13 Fed officials have given us speeches over the past fortnight. We have heard various views. From Kocherlakota who suggested that interest rate should rise by the end of the year, to Dudley who made it pretty clear that he thinks it would be a mistake to back off the gas pedal anytime soon.
None of those speeches matter much. The only thing that counts is Bernanke. The Fed will end up doing what he wants. There is no true debate at the Fed. All the speeches are show ponies to demonstrate that there is open thinking at the Fed. I don’t believe a word of it. But I do believe when Jon Hilsenrath echoes Ben’s thinking. I believe the Ben/Jon duo was at work in this WSJ article today. The critical words from Ben’s lips: (link)
a $600 billion program of Treasury bond purchases known as quantitative easing looks likely to run its course as planned in June. This will effectively mean the Fed is moving to a neutral stance of no longer easing while not beginning to tighten policy.
Mark Ben’s, Jon’s and my words. This is what the future will bring us. QE will end in June. But the policy of ZIRP will be with us for a long time to come.
There are so many factors at play in the big capital markets these days. The Fed is just one element in the equation. But if you focused on just their effort you would have to conclude that the end of QE but never ending ZIRP will bring us the following:
-Long end yields are going higher. I think the Fed moves have set us up for a 5% long bond and a 4% 10-year. Long bonds are a sucker play when the Fed continues to pour on the gas.
-ZIRP is good for stocks. We shall see about this. One can’t deny that equities are a better place to be than in cash that has a negative return.
-The dollar is going to get crushed. The Yen is a wild card that is influenced today by the uncertainties of Fukushima. We could see more weakness there. But the rest of the currencies of the world are going to have to move higher. I see the Euro over 1.5 the Pound pushing 1.7 and the CHF at around 85 to the dollar. The C&A dollars will be a good place to hide as well.
-PMs have to move higher. We will maintain a policy of cheap money and dollar debasement. How could the metals not respond?
-Inflation is going to roar. The food and energy component of the puzzle that Bernanke refuses to consider is going straight up in my opinion. I wouldn’t be at all surprised to see the non-core CPI up by 5% by the end of the year. We could easily see $5 gas in six months.
I think this is an insane next step for monetary policy. We will all pay a very dear price for this. I think it is also insane to have monetary policy conducted through speeches, innuendo and newspaper leaks.