If perception becomes widespread that the Fed is "behind the curve" and not indeed the masters of the universe, if it becomes apparent that one man, even if he did teach at Princeton, cannot micromanage interest rates and money supply to avoid a major recession...then watch out bond market, and watch out stock market.
My thesis is, though, that the Fed is beginning to lose credibility. #1- They have been instrumental in making the US dollar fall badly since 2001...this is stealth stimulus, and de facto inflation to boot...how much more are they going to be able to get away with before they crash the bond market? #2-their forecasts and jawboning of the financial markets has been both egregiously wrong (how many housing bottoms have they called this year?) and dangerous...they WILL at some point make things much worse. #3 check out the Bloomberg story about rumours of China starting to dump US treasuries...doesn't sound like they believe Bernanke, does it?
- Jonathan Benjamin via tim
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