Monetary Policy -- Setting The Clock For Confrontation

As expected, pushback on the QE program is on the rise: It is inflationary; it will create
asset bubbles; it is not proving effective . The economy has shown some signs of improve-
ment in Jul., but Bernanke chose first half 2013 performance -- 1.4% annualized GDP
growth and below target inflation -- to press the case for continuing the program.

My weekly leading economic indicator sets are turning up and that is welcome. But, we
probably need 4 -6 months of stronger indicator performance to make the case that the
economy is entering acceleration mode sufficient enough to have a worthwhile discussion
of sustainability. Outward appearances suggest strongly Bernanke will give up his
chairman role by 1/31/14 if not sooner and there could be substantial pressure on the new
chair to begin to wind down the QE program even if it is far from clear that it is ok
from an economic perspective to do so. Moreover, if the economy is set to do better as
many now think, QE liquidity could continue to funnel into the oil price, thereby setting
off higher inflation which, over time, could pressure real incomes. Put up more points
for the anti - QE hawks.

I figure the fight over curtailing QE is likely to be settled within the next 6 months. The
issue is a big deal because broad measures of financial liquidity are barely adequate to
sustain decent growth. I realize that a still very depressed construction market is holding
down private sector credit growth and that bank lending and funding would likely improve
sharply on stronger construction demand. Yes, there is idle developed real estate, but this is
also symptomatic of the business and banking caution the Fed has had to confront and
could well be indicative of a more general and shallow confidence at work in the system
which could be undermined by a premature reduction of the QE program.