Implode-o-Meter News - Don't Bet On The Fed

The consensus view is the Fed has either engineered the stock market drop to give it a free hand with QE3, or it will be "forced to do something" to combat the implosion of its pet fix to the broken economy, the "wealth effect" of rising stocks.

What these views miss is the Fed is now in a no-win endgame where its best move is to minimize the damage to what's left of its own reputation and credibility. The worst move here would be to double-down on QE3, because if it failed to goose global markets in a sustained fashion, then the Fed's remaining credibility and "magic" would vanish in a puff of smoke.

Charles' views are already worth considering, but we're not sure we agree, on the basis that it isn't clear at all the Fed (or the establishment) views the Fed's prior actions with QE1-2 as a "failure". After all, they've levitated the stock market all the way from the depths of September 2008 to current "passable" levels. And they've kept the banks afloat, or at least on life support to the extent they can keep making campaign contributions. And really, at the end of the day, isn't that all the government cares about?

So, on the basis that the Fed will face immense pressure to keep the gravy train rolling, we think further "quantitative easing" is more likely than not. But we'll see.

Relevant:

Don't Bet On The Fed