[quote=Bob]The problem for the Fed, and they are openly discussing it now, is that in order to avoid continued deflation, they have created inflation, and potentially hyper inflation. Later this summer Bernanke will have to make a very important decision…which is to say, he will have to decide whether or not to pull back on future Fed investment in US treasuries. If he decides to pull out, you will see the stock market drop, and at the same time, you will see mortgage rates spike.[/quote]
I think the biggest risk of the bond market is not that the Fed will pull out of US treasury. They can always buy again when the mortgage rate spikes. The biggest risk of the bond market is that Asia economy (particularly Chinese economy) will recover before the US does (as many economists are predicting that right now). Once the Chinese economy is in firmer footing, they will want to manage the dollar risks. So no matter how much Fed wants to buy in the US treasuries market, the Chinese government has at least 10 times that amount that they want to sell. Fed’s buying will create a perfect opportunity for them to unload their non-performing treasury asset at a much higher price to diversify into other currencies and assets. That’s the dilemma that will soon face Ben: to buy or not to buy.
