Spooked Fed caught in a trap

In trying to fix one problem with its money-printing programme, the Federal Reserve has created another: liquidity-addicted markets.

"As surprises go, the markets loved it," says Economist.com's Buttonwood blog. Last Wednesday, the US Federal Reserve was widely expected to begin tapering' its quantitative easing (QE) programme, reducing slightly the monthly amount of various bonds it buys with printed money. But, in fact, the central bank stayed its hand. Its decision not to temper the pace of its monetary-easing policy delighted liquidity-addicted markets. America's Dow Jones and S&P 500 indices rose to new highs, and European shares reached a five-year high. Bond yields fell as prices rose and commodities ticked up.

Why the Fed hesitated

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