End of QE2?

The Fed's QE2 program is slated to end in a couple of months. In the past week, various Fed officials have been discussing the program's end--perhaps to 'prepare' the market for the termination of Fed money printing.

One big question is whether the Fed will have the fortitude to end the stimulus program. After all, Fed chairman Ben Bernanke has gone on record that QE2 has helped firm the US economic recovery and lift stock prices (although he denies any culpability with respect to the increse in commodity prices).

Many market participants are wondering whether stock prices can stay elevated without such 'help' by the Fed.

Last week I heard an interesting theory that the Fed will in fact do a QE3 program. But it won't be able to find broad support for it until QE2 ends and stock prices (and perhaps economic activity) come down. If markets tank (as what occured after QE1 and before QE2), then it will become clear to others that another QE program will be necessary to keep economies and markets afloat.

In some other domain, this line of thinking would be considered preposterous. But given the bizaare situations that we've witnessed over the past couple of years, I would not dismiss such a scenario.

Again, the proposed scenario is: QE2 ends --> stock markets decline --> the Fed gets the justification for QE3

Life (or at least life in financial markets) is sometimes stranger than fiction.

position in SH