Politics

Guess who in DC is confusing the markets now?

Federal Reserve Chairman Ben Bernanke
Peter Marovich | Bloomberg | Getty Images

Add a new wild card to the already stacked deck of crazy in Washington: The Federal Reserve.

Congress and the White House are usually the ones confusing investors and threatening market chaos with their bitter and never-ending battles over fiscal policy. This week the Fed joined the party, shocking investors on Wednesday by backing away from its carefully telegraphed plan to start cutting asset purchases.

In a remarkable twist, the Fed essentially blamed itself for its own inability to execute on its own plans. Chairman Ben Bernanke and the Fed's Open Markets Committee blamed tightened financial conditions as the main reason for keeping up the pace of $85 billion a month in Treasury and mortgage debt purchases.

The reason for those tightened financial conditions: Bernanke's comments at the last press conference in June suggesting that the Fed would like to wind down QE by the time the jobless rate hit 7 percent, probably by the middle of next year.

With the jobless rate hitting 7.3 percent in August and economic data coming in mixed but not awful, markets grew completely convinced the taper would start in September. How could it not given what Bernanke said about the timetable?

Interest rates rose accordingly.

And then Bernanke and the Fed this week essentially said: "Never mind."

(Read more: Summers withdrawal removes pressure to cut Republican deals)

Market analysts did not take issue with the actual decision, noting that there was little risk to keeping QE in place as is for now. But they slammed the Fed for completely mangling one of its most important tools: Forward guidance about monetary policy.

"Now who is going to believe the forward guidance?" Jerry Webman, chief economist at Oppenheimer Funds, told me this week.

Bernanke and the Fed were able to cite one more good reason for holding off on the taper: The high likelihood of a fiscal crisis created by Congress and the White House.

Odds of a government shutdown remain significant.

The House this week passed a continuing resolution to fund the government past Oct. 1 that includes a provision defunding Obamacare. The Senate will kill that provision and send it back to the House.

But House leaders made clear they could then add more Obamacare provisions and send it back to the Senate yet again, pushing matters close to the deadline.

'The Fed misled us': Expert
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'The Fed misled us': Expert

Even if there is a shutdown, chances are it would be brief and have minimal economic impact.

But there is still no clear path to a debt ceiling increase with both sides dug in. Getting close to or past the deadline on that one could have a catastrophic impact that even the Fed couldn't fix.

ALSO THIS WEEK: The White House made it clear privately that Fed Vice Chair Janet Yellen is the likely pick for Fed chair following Larry Summers' decision to drop out in the face of opposition from Senate Democrats. Yellen is likely to face opposition from Republicans opposed to her dovish approach to monetary policy. But she probably will get support from all Democrats and enough Republicans to win confirmation fairly easily. The White House is taking no chances, however, prepping Senate Democrats to hit back at any Yellen criticisms.

— By Ben White, Politico's chief economic correspondent and a CNBC contributor. White also authors the daily tip sheet Politico Morning Money [politico.com/morningmoney]. Follow him on Twitter @morningmoneyben.