By Jeff Diamond - The Fed's exit strategy to its unprecedented monetary easing and money printing depend on the economy and our financial markets returning to normal. A happily expanding GDP, a receding of the credit crisis, a reduction in the massive levels of debt in both the public and private sectors, and several other dream-like occurrences. Now, let's consider the likelihood of that versus the likelihood of another crisis developing... Which do you think will happen first?
My personal prediction is for fireworks (i.e. severe selloff) to occur in either the Treasury market or the U.S. dollar. I will not recap the horrendous fundamentals that make this a possibility, since they are so widely described elsewhere...
So, I predict that the best laid exit strategies for the Fed will not come to be. Just as they were forced to take extraordinary actions to prevent a meltdown of the financial system, they will have to respond to a market spike in interest rates and/or a freefall in the U.S. dollar. That will preempt their plans for an orderly return to "normal."
We can listen to Ben Bernanke wax poetic today and tomorrow in front of his Congressional audience, but I think it's a waste of time. Whatever plans he outlines today will not come to pass in the manner that he is going to describe...
