You're basically arguing that the market is responding to the Fed committing to do the right thing and squashing falling inflation expectations (as shown on your graph through August) but if the Fed actually fulfills market expectations of what it will do it will be doing a bad thing. If the market gets disappointed by the Nov. 2 announcement, one can imagine inflation expectations will fall again and that would be a rather bad thing. I'm saying that the right thing for Fed to do is what the market is expecting it to do. Anything else at this point would have an adverse impact.
Not necessarily. As I've argued in prior posts, the Fed can change expectations just by sounding tough. The more they talk about how they can do a QE2, the less convinced the market becomes about the likelihood of deflation. Fed jawboning can be very effective. They don't have to do a thing as long as they can convince the market that if deflation showed up they will act decisively. The worst thing would be for the Fed to do QE2 if and when it was not necessary.
Scott,IMO what you say is true. However JD has a point. The market is expecting an action at its next meeting...in fact, I believe it is already priced in. If there is no action, or if it does not take the form and substance of what is expected, we will likely be in for a selloff. I suspect that you and I are a bit longer term oriented than some. I would actually welcome a selloff...just not of the '08 variety! BTW WFC's earnings were quite good. Credit trends continue to improve and they indicated loan demand is slowly picking up.
I do not think Bernanke is going to bet his career on jawboning even if it is the right thing to do. it looks like he would rather treat the nail with the flat end of a hammer.The US is already blowing new bubbles all over the place. The only question is where and what damage will result when they pop.
Pub,Emphasis on 'when'. Trends can last a long time..even if they're called bubbles.
John: I think you and I agree. If the Fed does not do QE2 then it's likely we'll have a selloff, and that would be a good buying opportunity. Like Larry Kudlow says today, you need to be ready for the Fed to disappoint, mainly because there is no reason for them to do a QE2 and maybe they will figure this out.
Scott,Your chart shows a nice correlation since the QE2 idea was floated in August. I see a similar correlation between gold and equities since the August announcement. This gold-equities correlation also took place during QE1. Can you expand your chart in this post to show the QE1 period?Thanks!
Grannis is entitled to his opinion but not his facts. What matters for possible QE2 is what the FOMC voting members vote.Now why doesn't Grannis post (link) to those speeches of the FOMC voting members articulating the nuances?The voting members are: Bernanke,Yellen,Dudley,Bullard,Duke,Hoenig,Pianalto,Raskin,Rosengren,Tarullo,WarshThe only voting member who is unequivocally opposed to QE2 is Hoenig.
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