Over the last 24 hours, the market has rallied on a Wall Street Journal piece stating that the Fed is considering a new bond buying program through which it would print money to buy bonds but then borrow the money back to make sure inflation remains under control. This has resulted in some commentators calling this “sterilized QE.”

The story was published by Jon Hilsenrath who is generally considered to be a mouthpiece for the Fed itself. Because of this, the markets are taking his story to be
gospel.

I don’t buy it. There is no such thing as “sterilized QE.” Either the Fed prints and inflation explodes or the Fed doesn’t and the market tanks. End of story. The notion that it can somehow inject money but then take it out to make sure there’s no inflationary impact is ridiculous.

Besides, the Fed cannot announce more QE due to political pressure (if they do Obama has NO CHANCE at re-election which in turn means the White House turning on the Fed) not to mention gasoline prices, which are already through the roof.

Do you really think the Fed would do QE now? What for? The markets have only fallen a few percentage points.
So… a much more likely interpretation of this is that this story is a Fed leak to attempt to juice the market because the Fed is going to disappoint by announcing NO QE at next week’s meeting.

Remember, just last week Bernanke told Congress that no more QE was coming. Also remember that the Fed has been largely using verbal and symbolic interventions to prop up the market rather than actual money printing or new monetary policies (Operation Twist 2 only shuffles the Fed balance sheet; it doesn’t actually inject more money into the system).

So my view is that the Fed is about to disappoint and is doing damage control by verbally intervening via its favorite Wall Street Journal reporter to juice the markets higher.

Which means… the Fed will disappoint, and we will get a market correction. This Hilsenrath story is just an attempt to prop things up verbally without the Fed openly contradicting Bernanke’s testimony last week. All the macro and technical signs point towards something bad coming this way. The red flags are literally everywhere. And judging by the significance of them, we could very well be heading into a full-scale Crisis.

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Graham Summers

Chief Market Strategist