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Busch: Fed Spikes Punch Bowl?

Last night, I tweeted: "How much fun will tom b if we get +150k NFP? Bernanke will hav lots o' fun appearing b4 House Banking Ron Paul 2 explain QE2."

Well, we got 159k+ and here’s what U.S. Rep. Ron Paul said yesterday:

  • U.S. REP. RON PAUL, IN LINE TO HEAD HOUSE SUBCOMMITTEE ON MONETARY POLICY, SAYS WILL PUSH TO EXAMINE FEDERAL RESERVE MONETARY POLICY DECISIONS
  • FEDERAL RESERVE IS 'WAY TOO INDEPENDENT', 'TOTALLY OUT OF CONTROL' - PAUL
  • PAUL SAYS SUBCOMMITEE WILL PUSH TO AUDIT U.S. GOLD RESERVES
  • PAUL SAYS DOES NOT BELIEVE DOLLAR CAN BE RESERVE STANDARD OF THE WORLD
  • PAUL SAYS FED'S QUANTITATIVE EASING DECISION IS 'OUTRAGE,' 'REPRESENTS CENTRAL ECONOMIC PLANNING AT ITS WORST'
  • PAUL SAYS WOULD TRY TO SHOW THAT FREE MARKET BETTER THAN BUREACRATS AT SETTING INTEREST RATES, MONEY SUPPLY
  • PAUL SAYS COMMITTEE WILL PROMOTE VIEW THAT RECESSIONS ARE DUE TO BAD MONETARY POLICY, NOT BUSINESS CYCLE

The ISM employment numbers and the ADP numbers were all pointing up and to a strong NFP. Unlike taking the punch bowl away as the economic party gets going, the Fed appears to be spiking it.

This morning On CNBC, Moody’s Mark Zandi stated that the economy needs +150k just to keep the unemployment rate steady at 9.6%. We need +200k to have it decline. Here’s where I disagree with mainstream economists, I don’t believe (neither does Martin Feldstein) that the risks are worth the reward on QE2. The nightmare scenario for the Fed and the US middle income earners is unemployment at 8.9% and inflation at 4% and climbing.

Remember, Federal Reserve chairman Ben Bernanke stated in August at the Jackson Hole conference that there are limits to monetary policy.

When will the Fed turn to Congress and the White House and say, "We’ve done all that we can. It’s time for you to engage in policies that encourage growth."

Ben Bernanke, Federal Reserve Chairman
AP
Ben Bernanke, Federal Reserve Chairman

I think you’ll hear this soon via speeches and testimonies.

For the markets, the Fed has stated by policy decision and op-ed that they want higher stocks, lower US dollar and steady-to-lower bond yields.

Just like the Republicans taking back the House, this is the honeymoon period for the Fed. Yesterday from banks potentially being allowed to issue higher dividends to Obama potentially agreeing to extending tax cuts for all earners to the Bernanke op-ed indicating a potential targeting of stocks, it was as good as it gets as every story that came out was positive for what the Fed wants and drove equity prices higher.

At some point, the markets will likely begin to question the Fed’s decision on QE2 in the face of improving economic data and soaring commodity prices. Watch the long end of the yield curve to see when bond investors run out of patience and signal a shift. Until then, party on with Big Ben and Risk-On trades......but there’s going to be a nasty hangover with a Ron Paul wakeup in your future.

Andrew B. BuschDirector, Global Currency and Public Policy Strategist at BMO Capital Markets, a recognized expert on the world financial markets and how these markets are impacted by political events, and a frequent CNBC contributor. You can comment on his piece and reach him hereand you can follow him on Twitter at http://twitter.com/abusch.