Sydney Morning Herald: Fed's twisted logic sends 'sell' signals

A pessimistic verdict on the US Federal Reserve's actions from David Llewellyn-Smith of the Sydney Morning Herald. Judging by the bloodbath in global markets, many share his views:

So, down we go. The last impediment to lower … well … everything (except the US dollar) has been removed.

There's no QE3. Markets didn't muck around. Everything risk and $US-sensitive took an instant pounding and the greenback jumped. The US equity markets got smashed into the close and our market will join in the slide at the open.

What we got from the FOMC was Operation Twist, as advertised.

[. . .]

As your columnist has argued before, at the zero bound, where the only price signal is the signal of policy-maker intentions to deflate or inflate the system, you can't feed a market rich desserts with thick topping then offer them a dry donut and still expect the system to inflate. Only a bigger dessert with more topping will serve.

I see no reason why both stocks and commodities shouldn't revert to the prices we saw pre-QE2, roughly 20 per cent-plus down for commodities and maybe 15 per cent on the S&P. And that's before we factor in any recession.

So, what might the “Twist” achieve?

Ironically, it may have some effect on the real economy. . .

[. . .]

In theory this looks OK, but the fly in the ointment for me is the US dollar. With Europe burning and the Fed being seen to be backing off debasement of its currency, the greenback must rise. That will slowly choke off the US export recovery and, making matters worse, will exaggerate the downswings in equities and commodities.

The new equilibrium we are about to find is lower.

Photo: Rueters; US Fed Chairman Ben Bernanke