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The Fed said that it would continue buying bonds at an $85 billion monthly pace for now, expressing concerns that a sharp rise in borrowing costs in recent months could weigh on the economy. What the Fed is really saying is that behind-the-curtain everyone is screaming that interest rates will rise and that will blow out the deficit. Gold rallied under the nonsense this will be inflationary, when in fact the opposite is necessary to send the deficit soaring out of control. This is why Japan bought government bonds to help keep rates down.
While the decision surprised financial markets, Bernanke refused to commit to a tapering of purchases later this year, as he had previously suggested. We are in a credit ceiling crisis and any rise in rates will blow the deficit out dramatically. I wrote an op-ed for the Wall Street Journal. I pointed that the miracle of the balanced budget under Clinton was shifting the debt more short-term saving on interest expenditure. This is the same policy. The Fed is trapped. It has boxed itself in and there is ABSOLUTELY no escape. It bought back long-term bonds to help mortgages and that reduced the debt to even shorter-term.
The Fed is in such a crisis mode that it cannot escape. Stop the $85 billion per month that is really negligible, and you are off and running as the market will anticipate higher rates. Bernanke tested those waters and hinted at what he would do and rates shot up like a rocket. They have injected tremendous volatility into the economy that will blow the lid off come 2015.75.
