QE2 Ends June 30: What Happens Next?

Total Assets of Federal Reserve

*Federal Reserve Total Assets

We’re starting to see some rumblings in the media about the end of QE2.  The scheduled completion of the program is June 30, 2011.  Two distinct narratives are emerging: 1) Will the Fed embark on QE3; and 2) Will the markets fall apart when QE2 ends.

I’m not sure that either of these will happen.  The old trader game plan of “buy the rumor, sell the news” doesn’t seem to be working with the new Fed Inc. regime.  These guys just change the rules as they go.  Most recently they’ve announced that the Federal Reserve Chairman will be doing live quarterly reports on the economy.  Does this seem surreal to anyone else?  A Federal Reserve Chairman conducting the equivalent of a CEO running a quarterly earnings conference call?  This represents a drastic shift from their traditional mode of operations.

Bernanke and the new Fed Inc. ushered in a new era.  It’s clear that the days of governing bodies acting too timidly and mincing words are long gone.  Bernanke is more transparent and acts more boldly than his predecessors and peers.  He’s running the Fed more like a business — one that has an unlimited balance sheet.  This is all uncharted territory and traders are unable to wrap their minds around the concept of a Fed that isn’t opaque and cryptic.  Cynical bunch.

So far the Chairman has proved to be a maestro.  The house of cards will fall down, but who’s to say it has to happen on June 30, 2011.  Too obvious.

Furthermore, ask yourself this: If the market gives the ending of QE2 a vote of no confidence, do you think Bernanke just lets it crash?  Or do you think he has another trick up his sleeve?  Nothing will surprise me at this point.

Additional Reading:

Tentative Outright Treasury Operation Schedule (NY fed)

Fed unlikely to extend QE2, officials say (Reuters)

Whether QE2 completed depends on outlook- Fed’s Plosser (Reuters)



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