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Tuesday, December 14, 2010
The nation's biggest bond managers weighed in today on the Fed's QE 2 program - the buying of longer-term Treasuries to inflate inflation expectations. That it has, in fact, pushed up inflationary expectations was noted and in the process the yield on the 10-year Treasury note has also spiked 90 basis points. The sharp push-up in yield bothers Steve Liesman (CNBC chief economist) not to mention Rick Santelli the excitable on-the-exchange floor CNBC reporter.
The bond managers (Gross of PIMCO and Volpert of Vanguard) deemed QE 2 a success. CNBC was aghast, given the sharp rise in yield and the fact that today's FOMC (Federal Open Market Committee) meeting statement didn't even mention the rise in yield. It also interests me that the stock market, which has risen sharply in anticipation of improving business conditions, was not mentioned. Committees have the habit of selectively choosing evidence to support their view. They are lawyerly in nature.
Is it or was it a success? I disagree with the bond managers and have to side with CNBC on this one. For one thing, I have to ask if the rise in rates is good for a housing market that is still struggling to get its bearings. Continuing to push longer term rates higher raises the risk of short circuiting a nascent recovery. The Austrian school of economics preaches that the economy on its own will recover from a down turn if given time. A lot can be learned from this body of knowledge. The Fed should swallow its arrogance and back off, IMHO.