Investors are scared stiff that the Fed has cranked up the printing press and inflation is going to run amok. What they are ignoring is the fact that very little of the money that the Fed is pumping into the system is making its way into the real economy.
The Fed is in a unique position at the moment; they are THE central counterpart for the US money markets. They know where EVERY body is buried. They can gauge the health of the money markets to an extent they have never been able to before. Once banks start withdrawing excess reserves from the Fed and putting them to work in a big way, the Fed can start to shrink the balance sheet. It’s like playing poker and being able to see all the hands. This should allow the Fed to ward off inflation before it can take hold.
My guess is we have a knee-jerk EUR/USD rally for a day or two followed by a reassessment. Markets will either turn decidedly toward reflation or they will fail. If reflation is the trade, the dollar will fall. If risk aversion returns, the dollar will rise regardless of the aggressive move toward quantitative ease.
The Fed is betting on risk aversion; they would not be making this audacious move if they were not extremely concerned that the economy is going to worsen and stay weak potentially for years to come.
How will we know if the reflation trade is for real? Oil will break and hold above $50 and likely move quickly higher; Gold will slide back below $890 and stocks will rally like we’ve never seen in our lifetimes.