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Pay Attention: Ben Bernanke Just Asserted His Independence

Ben Bernanke is sending a loud and clear message to the markets today.

Federal Reserve Bank Chairman Ben Bernanke
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Federal Reserve Bank Chairman Ben Bernanke

The message: I'm not going to be pushed around by the markets.

In today's Wall Street Journal, Jon Hilsenrath delivers what is clearly a communique from the Fed chairman to the markets. Instead of announcing a shock and awe quantitative easing program next week, the Fed will proceed slowly.

The expectations that the Fed would immediately begin an asset purchase program sized somewhere between $500 billion to $2 trillion now need to be cut down to size.

Instead, we should expect a bond buying program of just a few billion dollars over several months.

This flies in the face of recent predictions that the recent run-up in the bond and stock markets could force the Fed into taking dramatic action at next weeks policy meeting. The idea had been that the Fed wouldn't want to see the bonds and stocks sell off after an announcement tantamount to a vote of no confidence in the Feds ability to manage the economy so it would have to exceed expectations with a super-sized quantitative easing program.

It was supposedly a difficult dilemma for the Fed, one that was thought to be putting the credibility of the Fed on the line. It was almost a lose-lose-lose proposition.

If the Fed announced QE2 in the range of $500 billion, the consensus was the market would sell off or remain flat because that had already been priced into stocks and bonds.

If the Fed announced a super-sized QE2, the consensus was that the markets would likely rally although the fear was that a failure to rally would put the Feds credibility on the line.

A super-sized announcement might also stoke fears about future inflation hurting bond prices or that the economy was in very bad shape hurting stocks. Worse: it might do both.

Bernanke seems to have found a clever solution to the dilemma by telegraphing QE2 Lite. This totally changed the game. The Fed now looks independent. This is reassuring no one really wanted a Fed that was being led around in circles by stock and bond prices.

What's more, a failure of QE2 Lite wont necessarily jeopardize the credibility of the Fed. If the markets and economy don respond to QE2 Lite, the failure can be blamed on the small size of the program rather than indicting the effectiveness of Fed easing altogether.

Finally, it must be said that Bernanke seems a lot smarter today than he did a week ago. And that will also likely boost the confidence of investors.

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