“However, Bernanke and other members of the FOMC have expressed uneasiness about the potential for continued QE to contribute to bubbles in parts of financial markets and the recently surging U.S. equity market may be adding to their discomfort. The Fed must also be considering the growing potential for rebounding housing and stock market wealth to support the U.S. economy making extreme monetary ease less appropriate,” Kelly wrote.
“Finally, improved budget numbers, while emphasizing the degree of fiscal drag on the economy right now, also make the current QE program look more excessive as the Fed’s demand for new bonds (both Treasuries and mortgages) exceeds the entire net supply of bonds from the Treasury department,” the strategist added. “While Bernanke will, as usual, choose his words carefully, there is clearly a risk that something he says or some language in the Fed minutes could cause long-term interest rates to move higher.”
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Full disclosure: Tom Lydon’s clients own TLT.