Conflicts at the Federal Reserve Emerge

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The Federal Reserve's policy makers may look like a happy united family, but disagreements about future monetary maneuvers are surfacing.

William Dudley, president of the New York Fed and Vice Chairman Janet Yellen agree than keeping interest rates fixed near zero percent until 2014 is needed to give the economy more time to recover.

Others like Charles Plosser, the Philadelphia Fed president say future stimulus should be linked to how the economy performs, not to a calendar. Atlanta Fed president Dennis Lockhart and the St. Louis Fed president James Bullard don't think more easing is needed. 

From 2008 to 2011, the Fed gobbled up $2.3 trillion in bonds via two acrobatic rounds of something called "quantitative easing" or "QE." That was the easy part. How does the Fed exit the party without anyone noticing? 

Who are these People?
The Federal Open Market Committee (FOMC) is the monetary policymaking body of the Federal Reserve System. The FOMC is composed of 12 members, which consists of the seven members of the Board of Governors and five of the 12 Reserve Bank presidents.

This imperfect arrangement shows what a delicate balancing act the Fed truly has. Level headed financial opinions by Fed members with a disciplined fiscal sense are canceled out by the liberal free spending Keynesian members. Lockhart is a voting member on the FOMC this year and Bullard and Plosser are not.

The Fed's plan of redeploying $400 billion of short-term cash into long-term U.S. Treasuries (NYSEArca: TLT) won't be completed until June, yet financial markets are already begging for QE3. Will the Fed give the market another injection?

Unintended Beneficiaries
Although the broader economy has always been the Fed's intended target (that's what they tell us), financial markets, particularly high risk areas, have been the obvious beneficiaries. 

"Risk on" trades in emerging market stocks (NYSEArca: EEM), junk bonds (NYSEArca: HYG), and small company stocks (NYSEArca: IWM) have enjoyed big gains. The $1 billion sale of Instagram to Facebook has the entire venture capital circuit in a frenzied state. But it's a double edged sword and high risk areas are showing some fatigue.

Over in China (NYSEArca: FXI), gross domestic product ( GDP ) increased a disappointing 8.1% during the first quarter from a year ago and fell short from the 8.4% median estimate of economists surveyed by Bloomberg.

Distorted Markets
Whenever there's a sell-off, financial markets fret about the chances of more future monetary intervention by the Fed. And like an ill-mannered child, they throw a hissy fit if they think they're not going to get whatthey want. A psychologist would say financial markets have the same symptoms as the depressing state of a person addicted to drugs. Although the victim may feel well after their fix, the after effects are mortal.

The Fed's exit strategy from trillion dollar stimulus plans is becoming harder and harder because financial markets have become more and more addicted. The ETF Profit Strategy newsletter shows you how to navigate the treacherous waters of Fed manipulated markets along with simple income strategies used by large institutions. 



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , ETFs

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