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Bernanke and other Fed doves are not dead yet

February 21, 2013: 11:20 AM ET
Investors are suddenly nervous that the Federal Reserve will end QE sooner than expected. But that's not likely as long as inflation dove Ben Bernanke is in charge.

Investors are suddenly nervous that the Federal Reserve will end QE sooner than expected. But that's not likely as long as inflation dove Ben Bernanke is in charge.

The opinions expressed in this commentary are solely those of Paul R. La Monica. Other than Time Warner, the parent of CNNMoney, Abbott Laboratories and AbbVie, La Monica does not own positions in any individual stocks.

Last I checked, there has not been a palace coup dtat in the halls of the Federal Reserve. Kansas City Fed president Esther George has not wrested control of the central bank's chairmanship from Ben Bernanke. But that's how the market reacted late Wednesday.

Investors had a mini freak-out after the minutes from the Fed's last meeting were released. The Dow tumbled more than 100 points. The market dipped again Thursday and the Fed was being blamed for the sell-off. Traders seemed to be worried about this line from the minutes. "Many participants also expressed some concerns about potential costs and risks arising from further asset purchases."

George, the only member of the Fed's policy committee to vote against the Fed's decision last month to continue that series of asset purchases, is presumably one of those participants.

Related: Meet the Fed's newest voting members

The fact that she's not alone may be spooking investors who have grown accustomed to the Bernanke-led Fed helicopter dropping as much liquidity as necessary to keep the economy and market afloat. The Fed's so-called quantitative easing programs have kept interest rates low and are a big reason why stocks have done as well as they have since this bull run began nearly four years ago.

But here's the thing. Bernanke is still in charge. And his second-in-command, Fed vice chairman Janet Yellen, is even more "dovish" than Bernanke. That means that she is far more worried about the weak job market than the future threat of inflation that could arise if the Fed continues to buy Treasury bonds and mortgage-backed securities like they are going out of style.

Fed members like George are said to be more "hawkish" and fear that inflation could be just around the corner.

Unless Bernanke and Yellen are lobotomized, there is absolutely no way in h-e-double hockey sticks that the two of them will agree to a substantial change in the Fed's monetary policy until there are more concrete signs of improvement in the job market. And the Fed will need to see several months of that before it is ready to pull back on QE. A better-than-expected job report next month -- if that even happens -- will not be considered a trend. The last few months have merely shown steady, but not spectacular, growth in payrolls.

Related: Fed's Janet Yellen says fixing the job market could take years

The latest consumer price numbers from the government show that inflation is not even remotely a problem right now. The Fed hawks may be able to make a stronger case for pulling back on QE ∞ if inflation picks up dramatically -- even if job growth remains weak and the unemployment rate stays stubbornly high. But a year-over-year increase of 1.6% in consumer prices is not large enough to start setting off inflation alarm bells.

The fact that the stock market often reacts to Fed minutes continues to perplex me. We already knew three weeks ago when the Fed had its meeting that most members want to keep QE going for awhile. In this rapidly moving, what's the latest data, world we live in, an event from three weeks ago is "old," not "news."

It's not surprising that some (or even many) members of the Fed are starting to think about a time to put an end to QE and even start raising interest rates again. After all, the Fed cut its key short-term rate to about zero in December 2008. And the first round of QE began in March 2009. So the Fed has been taking unusual, emergency-like measures for four years now. Of course, the Fed has to wonder when it's time to get out of crisis mode.

Related: Why Jim Rogers hates Ben Bernanke

But that time hasn't come yet. Want more proof? While the equity market threw a minor hissy fit on Wednesday, the bond market took things in stride. Yields on the 10-year U.S. Treasury barely budged. And rates fell slightly Thursday, dipping back below 2%. That's the opposite of what you'd expect to happen if bond investors thought the Fed was going to stop being the buyer of last resort for U.S. assets.

Bond rates rise when prices go down. The Fed has helped keep long-term rates low by buying a LOT of Treasury bonds and other fixed-income securities. If the bond market was really worried that Bernanke and Yellen were starting to listen more closely to the cries of the Fed hawks, rates would edge much higher.

Yes, the yield on the 10-year is up a fair amount from its low of just under 1.4% last year. But that was its all-time low. A 2% yield is still very low. The 10-year was yielding around 4.5% just before the stock market peaked in October 2007.

Despite the fact that everyone and his brother (and sister) seems to be calling for an imminent burst of the bond bubble, fixed income investors still aren't running for the exits. The only reason for them to do that en masse would be if the economy really started to pick up, inflation became a bigger concern and the Fed members that matter (i.e. Bernanke and Yellen) actually start talking about an end to QE.

Don't get me wrong. There are plenty of reasons to be nervous about this runaway bull market. The Dow and S&P 500 are near all-time highs even though the U.S. economy is still anemic and could take another hit if the nimrods in Washington let the forced budget cuts (don't you dare use that highfalutin S-word) take effect next week. Rising gas prices could crimp consumer spending. Europe is still a financial mess.

But nobody should be worried about the Fed. They are not going to pull the plug early and allow the market to crash. If anything, Bernanke and Yellen are going to err on the side of letting QE go on too long and fulfilling the worst fears of George and other hawks.

That's probably a 2014 or 2015 problem though -- not something to obsess over right now.

Finally, a quick aside to congratulate a loyal Buzz reader. I tweeted about Tim Horton (THI) raising its dividend this morning. The combination of hockey and doughnuts led me to ask my followers to complete this famous sports quote: Have another doughnut ...

Christian Koulichkov, aka @BostonBroker33, was the fist to correctly finish the phrase. It's "you fat pig." Those words were uttered by former New Jersey Devils coach Jim Schoenfeld during a playoff game in 1988. He said it to referee Don Koharski following an altercation. Christian "won" three Reader Comment of the Week awards last year. Now he gets this shout-out. So he's the charter member of the Buzz Reader Hall of Fame. Maybe I'll send him a box of doughnuts.

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Paul Lamonica
Paul R. La Monica
Assistant Managing Editor, CNNMoney

Paul R. La Monica is an assistant managing editor at CNNMoney. He is the author of the site's daily column, The Buzz, and also tweets throughout the day about the markets and economy @LaMonicaBuzz. La Monica also oversees the site's economic, markets and technology coverage.

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