Between a rock and a hard place

The release of the December 11-12th Fed Minutes would indicate that the Fed is beginning to show some concerns about the heftiness of its own balance sheet. With the addition of the latest round of QE, the Fed is on target to grow its balance sheet by another $1 trillion over the next 12 months. The private concerns about the exit strategy with such a sizable inventory of bonds, does not jibe with the public commentary that surrounded the latest bond buying program. Perhaps the Fed is now torn between giving the markets and the economy (ostensibly) what it wants, and the realization that additional purchases mean additional unintended consequences.  The market reaction after the release of these minutes was perplexing to say the least, with equities selling off only slightly and commodity markets selling off sharply. If Fed purchases have, in fact, had little incremental impact on real economic activity then the cessation of these programs should have almost no impact on capital markets.  The impact will most likely be felt however during the unwinding of these purchases, which should adversely affect all markets.

Perhaps the Fed is attempting to manage peoples expectations as to the length and breadth of additional non-conventional measures. If this is the case, we should most likely get prepared for increased volatility as softer data intersperses with Hawkish Fedspeak. What this all means for commodity markets remains to be seen, but expect price action similar to that in 2012 as market participants navigate an increasingly conflicted Central Bank Environment.

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