Knee-jerk Response To Fed Stupidity

As the dust is settling, some good preliminary observations on how the latest (and maybe last) move by the Fed changes the landscape, from Bob Savage.

What worries people now?

1) FED surprise action begs the question of what do they know that the market doesn’t? So many fear their forecasts for a much weaker economy.

2) FED action is viewed as the last measure. The ability for the FED to do more than this is now a game of how much more to buy. So the over $1 trillion expansion of its balance sheet announced today can be followed by more and more. But the shock and awe effect will be less and less. The last bullet has to be the most accurate and many fear it may miss the mark.

3) Deficits and USD The action of the FED and the stimulus package sparks concerns over how the US will pay for this and what it means for the USD. So the break in the DXY at 85. The risk of a much bigger down turn in the USD is set up by the charts and many fear it will be part of policy. Weaker USD flows out of this action.

4) Inflation This worry seems years away but many will watch for it and trade accordingly. The risk stems from the FED being ahead of deflation and therefore well behind risk of inflation. Being able to discern the difference will be tricky eventually – but it’s a risk that won’t be known until its too late – not unlike reading in the garage with the car on.