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