The Fed Must Now Manage Expectations VERY CAREFULLY If It Doesn't Want to Trigger Another Crash

Phoenix Capital Research's picture


The Fed has a HUGE problem on its hands.


Fed officials are well aware that stocks have become totally disconnected from reality. However, they cannot simply come out and discuss ending stimulus efforts outright because it would cause a market collapse. Remember, the single most important role for the Fed post-2008 is to maintain confidence in the system. So they cannot risk any explicit statement that they will be pulling the punchbowl.


Consequently, Fed officials have begun a careful process of managing down expectations regarding future stimulus.


Federal Reserve Bank of St. Louis President James Bullard gave remarks Thursday on “U.S. Monetary Policy: Easier Than You Think It Is,” at a special banking forum sponsored by Mississippi State University’s Department of Finance and Economics…


Bullard discussed four considerations for QE3 going forward.  First, while substantial labor market improvement is a condition for ending the program, Bullard said that “the Committee could consider many different aspects of labor market performance when evaluating whether there has been ‘substantial improvement.’”  These include the unemployment rate, employment, hours worked, and Job Openings and Labor Turnover Survey (JOLTS) data.


Second, “Without an end date, the Committee may have to alter the pace of purchases as news arrives concerning U.S. macroeconomic performance,” Bullard said, noting that “substantial labor market improvement” does not arrive suddenly.  “This suggests that as labor markets improve somewhat, the pace of asset purchases could be reduced somewhat, but not ended altogether,” he explained.  “This type of policy would send important signals to the private sector concerning the Committee’s judgment on the amount of progress made to that point.”


A third consideration for the QE program is inflation and inflation expectations, Bullard said.  Current readings on inflation are rather low, which he said may give the FOMC some leeway to continue asset purchases for longer than otherwise.  Although worries about rising inflation have so far been unfounded, “the lesson from QE2 is that inflation and inflation expectations did trend higher,” he said, adding that it is too early to know if that will happen with the current QE program.


Finally, he said, “The size of the balance sheet could inhibit the Committee’s ability to exit appropriately from the current very expansive monetary policy.”  He explained that when interest rates rise, asset values will fall, which could possibly complicate monetary policy decisions.


Note that Bullard, like the December Fed FOMC, mentions “inflation expectations.” The Fed cannot ever openly admit that inflation is a problem because doing so would inevitably lead to the realization that the Fed is in fact the primary cause of inflation in the financial system.


Consequently the Fed must use coded terms such as “inflation expectations” to discuss the presence of inflation (note that “inflation expectations” moves the blame for prices to investors who expect inflation as opposed to the Fed which has created inflation).


The fact that this phrase (inflation expectations) pops up in both Bullard’s speech and the Fed’s FOMC minutes indicates that the Fed is well aware that it is causing inflation to spiral out of control. This is a big reason why the Fed is beginning to manage down expectations of future stimulus.


Indeed, Bullard is not the only Fed official to be talking down QE.


Federal Reserve Bank of Cleveland President Sandra Pianalto said the gains from the Fed’s $85 billion in monthly bond purchase may fade.


Over time, the benefits of our asset purchases may be diminishing,” Pianalto said today in a speech at Florida Gulf Coast University in Fort Myers, Florida.

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“Given how low interest rates currently are, it is possible that future asset purchases will not ease financial conditions by as much as they have in the past,” she said. “It is also possible that easier financial conditions, to the extent they do occur, may not provide the same boost to the economy as they have in the past.”


Fed officials are debating how long they should continue their bond buying, designed to foster economic growth and reduce 7.9 percent unemployment. The Federal Open Market Committee last month kept the monthly purchase pace unchanged at $40 billion in mortgage-backed securities and $45 billion in Treasury purchases.


The central bank has said the purchases will continue until the labor market improves “substantially.”


Inflation is on the rise in the financial system in a big way thanks to the Fed and other Central Banks’ money printing. However, the Fed has now realized that things are beginning to spiral out of control. As a result it is managing down expectations for further stimulus. This will not contain inflation in any real way. However, it will have a major impact on asset prices, particularly stocks which are now in a bubble, closing in on all-time highs despite earnings falling, the global economy rolling over, a banking crisis in Europe, a sovereign debt crisis in Europe, China slowing its liquidity injections and more.


This will end very badly. The Fed has set the stage for another Crash. And this time around its hands will be tied as it has used up all of its tools just creating this bubble.


With that in mind, smart investors are taking advantage of the lull in the markets to position themselves for what’s coming.


We offer several FREE Special Reports designed to help them do this. They include:


Preparing Your Portfolio For Obama’s Economic Nightmare

What Europe’s Crisis Means For You and Your Savings


How to Protect Yourself From Inflation


And last but not least…


Bullion 101: Everything You Need to Know About Investing in Gold and Silver Bullion…


You can pick up free copies of all of the above at:




Phoenix Capital Research



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BlueCheeseBandit's picture

The fed will not take away the punch bowl. Maybe they were floating the idea recently, but with the market reaction, followed by a "correction" in WSJ and Bernanke's testimony, they realize now that they can never take away the punch bowl.

QE forever.

Grand Supercycle's picture

SP500 / DOW / NASDAQ daily & weekly uptrends are simultaneously completing a protracted topping process.

The resultant downtrend will have good momentum.

lasvegaspersona's picture

Graham would have been right long ago if the monetary system made sense. The rules keep changing and so logic fails.

We note the Euro did not collapse last year...

cynicalskeptic's picture

all this at a banking forum sponsored by Mississippi State University’s Department of Finance and Economics…     


am I the only one wondering 'WTF?!'      I mean , really now, this is the BEST  they could do?  Was Southern Alabama State's School of Money and Moonshine Making booked up?


we're talking REAL experts here - a confluence of specialized knowledge, long term experience and financial prowess unequalled in the United States.......

But then given the history of all the 'experts' from U of Chicago's Economics Department, Harvard,, et. al. how much worse could ANYBODY else do......

lakecity55's picture

screw it. these assholes are lying about everything.

mt paul's picture

do not

feed the fed..

Stuck on Zero's picture

The Fed: 25 years of easy money and tough talk.  You'd think we'd be wise to it by now.


economicmorphine's picture

This post is nonsense.  The Fed is not changing direction.  The only thing that has changed is that the dissenting governors have gotten more vocal because they recognize that printing is not producing a big enough impact to make a difference.  They see an opening and are exploting it.  Occam's Razor, bitches.  

Fuh Querada's picture

And the dissenting governors do not have real voting rights, they are all for show to create the illusion of debate.

Kriya144's picture

Come on Ben... just bring the pain already!

Clowns on Acid's picture

Sell USTs. If the Fed continues their purchases, and the funds rotate from bonds to equities (or better yet pms or commodities), bonds will fall.
If the Fed stops bond purchases, ...(hey do you want to buy 'em) ? Stocks get hit except for steady, cash rich dividend payers. Why do you think that AAPL, MSFT and others are hoarding cash?

RebelDevil's picture

more like bonds to gold. - cash will be worth shit soon.

Bandit und Buster's picture

The Fed Must Now Manage Expectations VERY CAREFULLY If It Doesn't Want to Trigger Another Crash"

LOLOLOLLLOOOLL!  WTF?  Does this author REALLY think the FED is 'trying to do the right thing"? Ha Ha Ha! Fools!

The fed has the money and the US sheep RIGHT where they want them! 

WAKE UP DUMMIES!  They have a plan and are executing it. Do you think they have the FEMA camps for day-care centers? And the coffins for ....?? 

You are being joogled!

bunnyswanson's picture

The war never ended, it just became covert.  This century long undermining of the USA is them winning the war.  People are dying.  Rather than try to analyze the methods being used, it's time to create an underground railroad so the people who have been screaming at the top of their lungs in order to alert the public to the seige won't be assassinated.  The pull backs and progression are part of it.

They want everything.  They want it all.  They want control of eiverything and this is what they have always done and always will do and this is why time after fucking time we have had to back them into a corner in an attempt to save our lives.

Americans promoting Agenda 21 should be tried for treason.  There should be by now a parallel court system in place and a govt working to begin dismantling the legislation that will send americans into their graves.  You are hated, despised, by them.  Nothing you do will change it.  They are not nice people .  They want it fucking all.


WHAT WILL IT TAKE TO MAKE YOU REALIZE THAT THERE WILL BE NO TURNING BACK IF BOOTS END UP ON THE GROUND OF AMERICAN SOIL MOTHERFUCKERS?  WHAT?  Fucking pathetic ass americans who have not concept for an occupation except when it is on CNN and fucking wolfe blizter and his pretty tie tell you it's safe here now because Americans are fighting terrorism.


ZIONISM WANTS WHAT YOU HAVE AND WANTS YOU GONE BECAUSE THERE WILL BE NO WITNESSES.  americans of all races including jews are going to be erased off the face of the earth and it will be with glee, your assets are gone and you are useless other than for slaves.

economicmorphine's picture

Oh please.  All they have to do is sit back and watch.  We're doing it to ourselves.  They may have supplied the crack, but we're the idiots who keep shooting up.  A little self discipline on the part of most of us would have solved the problem and made "them" irrelevant a long time ago.  That's the real problem, chief.

bunnyswanson's picture

when your president tells his country to "GO SHOPPING" for the good of the nation, you do what you are told.  This is not a failure of the citizens.  This is a failure of leadership.  Media outlets should be burned to the ground. 

But instead,the govt checks will cease and yes, the people will at war with each other because starvation makes you go insane.

It's not too late but it will be soon.

MGA_1's picture

And we just got our reverse indicator - time to go long the market...

disabledvet's picture

You need to study the difference between "cost push" and "wage push" inflation. The latter...if it exists at exists in the breach. The former (what we actually pay for a good) while obviously draining us of all our money is not "inflationary" per se since it makes that next purchase all the harder unless wages compensate. Wages are BARELY compensating three years running...this is what the Fed means when it says there is no inflation (we aren't seeing a visible rise in our incomes) and so the Fed policy is to "push for greater employment" in the hopes that someone somewhere "can afford all this bullshit." so far it appears our best hope is to "pass on our bullshit to someone else" (cough, cough Europe cough cough) so that at least we claim "but look how bad they suck!" and then call it a day.

LawsofPhysics's picture

Graham will be correct eventually...

Hedgetard55's picture

Jesus has already returned, IF you have "eyes to see and ears to hear and a heart to perceive".

SheHunter's picture

yeah yeah.  And he blesses our soldiers as they go off to kill brown babies in third world countries.  Blah, blah, blah blather blather.

jimmytorpedo's picture

In a universe of infinite possibility all and every possibility is not only possible but necessary.

silverserfer's picture

what is the crash you speak of Graham?

Imminent Crucible's picture

Notice what else Ben said to Congress: "Monetary policy (that's us Fedsters) is now at cross-purposes with fiscal policy (that would be you blundering idiots in Congress)".

I added the parenthetical expressions to make Ben's meaning exactly clear. Ben is saying, "We got rates at zero. That's so our bankster cronies and the giant corporations can borrow all the money they need to maintain the appearance of solvency and capex capability. But you buttheads are suddenly worried about exploding debts and deficits, after forty damn years of Borrow And Spend.  Now that we're in a Depression, you have an attack of fiscal sobriety. Your timing sucks. Retards!"

The Fed is pretending to be concerned about the poor little shrinking middle class and their vanishing jobs and retirements.

Congress is pretending to be concerned about the mushrooming national debt.  "Raise taxes!" screech the Demoblicans. "No, cut spending!" bray the Republicrats.

Nuke Congress. Nuke the Fed. Burn it down, start all over again.

fxrxexexdxoxmx's picture

the fed is buying stocks from friends and family members. the fed is only there to enrich themselves and their families. the rest of it is just bs
bankers making bankers richer.

dumpster's picture

graham with no clue but post stuff just to fill a hole

tony bonn's picture

the fed is NOT taking away the punch bowl....their purchases will accelerate until the system implodes....the fed's balance sheet is negative and the only thing keeping it from nuclear vaporization are its continued purchases of there anything left to buy?

andrewp111's picture

Their purchases are already near maximum. Once they buy all treasury and agency bond issuance, what then? Those are the only kinds of debt that Uncle Ben has said it is legal for him to buy. If there is another crash, what is he going to do - load up on junk bonds?

lasvegaspersona's picture

The Fed will eventually buy EVERYTHING..... all debt....even those old gym socks... as it seeks to save the the expense of the currency....which is after all expendable...

spinone's picture

I got some old gym socks I can tranche up

The Trade Group's picture


Hedgetard55's picture

The Treasury bubble will be the final bubble. When that bursts the financial system collapses.


Meanwhile, Ben sees no signs of an equity bubble, as he saw no signs of a real estate bubble in 2007/2008.

Tango in the Blight's picture



Kriya144's picture

I got my tin foil hat ready!

Sorry, did I say tin foil? It's some shiny metal anyway...

boogerbently's picture

Couldn't they quit spending and just SAY they were doing it?

I mean, we run on BS anyway.

andrewp111's picture

It is aluminum, not tin.

SafelyGraze's picture

nank: hi
sheep: what's going on

nank: here's the thing
sheep: hit me

nank: you know how you meet a girl ..
sheep: baaa!

nank: you want to shtup her ..
sheep: you can't say that!

nank: exactly! so you say she has a nice smile ..
sheep: you can't tell her the truth

nank: not if you want to shtup her
sheep: so that's "jaw boning"

nank: but after you've told her you love her ..
sheep: wait! I know this! you mean ..

nank: duh
sheep: zero percent forever ..

nank: 100 billion a month in asset purchases ..
sheep: a trillion in pomo ..

nank: not to neglect the currency swaps
sheep: the excess reserves

nank: it's all pledges of love
sheep: love 4 ever!

nank: you can't unwind that
sheep: you can't say "I don't love you any more"

nank: not if you want some luvvin
sheep: but what do you say after "I love you", nank?

nank: there's the problem
sheep: "I super-duper love you"?

nank: the committee is working on that one
sheep: a new language of love

nank: we want dow 36 thousand
sheep: who wouldn't?

nank: but we want it organically
sheep: the girlfriend who doesn't require the "I love you"

nank: we want to talk trash
sheep: 20 percent interest!

nank: sell off our assets!
sheep: shrink the balance sheet!

nank: mop up the liquidity!
sheep: but without any .. adverse outcomes

nank: no mal-events
sheep: just more velocity

nank: the worse you treat her, the more she begs for it
sheep: that's the kind of economy we need

nank: is it bad to want that?
sheep: nobody has money, but they bid up equities anyway

nank: you're making my knees weak
sheep: "you're pissing me off, you slut!"

nank: that's the kind of economy we dream of
sheep: the committee

nank: we get so tired of telling her how pretty she is
sheep: telling her about this summer's vacation

nank: if she'd just do what we want her to ..
sheep: then you could be honest with her

nank: honest. direct. straightforward.
sheep: "put out. shut up. give me your money."

nank: you left out "bitch"
sheep: but you can never just say that\

nank: you must manage expectations VERY CAREFULLY
sheep: it can be fatiguing

nank: you have no idea
sheep: hence the need for metaphors

nank: "I have a hammer and suspenders"
sheep: "you are the wind beneath my wings"

nank: "we are facing headwinds"
sheep: "you are my snookie bear"

nank: it's stupid, but it still works
sheep: it's romance 

nank: wooing the public is like wooing a girl
sheep: you have to lie

nank: you have to use romance-talk
sheep: but eventually you get in over your head

nank: the purpose of a bank is to make money by lending it
sheep: "here's one million .. pay me back two"

nank: you have to use romance-talk
sheep:  "you have beautiful eyes"

nank: frankly, you just want to shtup her
sheep: frankly, you just want all their money

nank: but you can't say that
sheep: it would be crude