When Will the Market Figure Out that New QE is Not Coming?

New QE?  Nope.

If for no other reason than to preserve its bureaucratic power.  A move is already building in the Republican party to audit, alter or even shut down the Fed.  The House of Representatives passed a measure to audit the Fed just 2 weeks ago; it passed 327-98.  Which, yes, means  the vote included many Democrats.  It doesn't even matter that its dead-on-arrival in the Senate; pressure is building, and if the Fed acts at all and fails, they will be seen as interfering in the election process, and will take all the blame for economic failure (no matter how much they actually possess).  They will also earn the hatred and disgust of Republicans, Independents, and maybe even some Democrats, and you will see a concerted effort to alter or abolish the Fed as a result (don't underestimate hysteria if the shit hits the fan).  "But, but, if they print and the markets go up in response, Obama will win the election, and your scenario won't play out."  Maybe Obama would win the election, and even if he did, the Republicans will be back in power in the not-too-distant future, at which point the as-we-know-it-Fed's days will be numbered.  Now, if Bernanke was inclined to meddle in politics to get Obama re-elected, his smartest play would be to give serious indications of New QE every time he speaks, from now till the election, never actually delivering until after the election.

Second, Bernanke has basically said the same thing for months of weakening data: the Fed will support the recovery if necessary.  Thanks, but we already knew that.  What he's trying to tell the heroin-addicted-market-that-only-hears-what-it-wants-to-hear, is that there is no need for QE, for the reason listed below.

Third, as Bridgewater notes (through Zerohedge), each successive round of stimulus has a smaller and smaller impact, and that reduced impact gets shorter with each use.  Another, even weaker QE program would only confirm this, and the Fed would appear to hold a gun, but with no bullets.  That scenario would be far more dangerous for markets than no New QE at all.

Finally, and further reinforcing my view above, there is no economic cover to intervene .  Yes economic data has pointed downward lately, but guess what?  It happens.  Downturns happen.  Recessions happen.  The Fed has little ability to affect employment and there is no possibility of deflation at the moment.  Grow up Peter Pan, Count Chocula.  Guess what? The recovery is doing just fine (given its origins), its weathered many euro-shocks, and its rocked 'em all (only an enlightened few will get that reference, lol).  There's no possible need for monetary policy intervention, at this time.

The following chart looks at the extension of bank credit and its trajectory, now vs. 2010/QE2:

The next two charts show current inflation as well as expected future inflation, both at Fed targets (via Calafia Beach Pundit):

Core PCE Consumption Deflator:

5Y/5Y forward inflation expectations:

When will the market price in no New QE3?

Unless I'm missing something, the next time Bernanke speaks will be at Jackson Hole on 8/31/12.  I can't say for certain he won't try and tease the market, but I just don't see him laying out a plan for New QE either.  My baseline scenario is for him to note the ongoing economic weakness , the issues related to Europe, and to basically say what he's been saying for months: the Fed stands ready to act, if necessary.

Now, the market could very well take whatever he says and believe what it wants to.  In which case, we may have to wait for the FOMC decision 9/13/12 for the market to finally get it.