“… Typically, jawboning efforts have been undertaken by those seeking to lower or moderate price pressures, but Federal Reserve Chairman Ben Bernanke and his cohorts are putting a novel spin on the technique. By speaking regularly and aggressively about a second round of quantitative easing, they have been successfully jawboning inflationary expectations higher, as attested to by the recent dip of TIPS into negative yield territory for the first time. Whether such suasion is moral remains open to question, but it is clear that most market participants have bought into Big Ben’s rhetoric.
Trouble is, after weeks of furiously fanning the flames of those expectations, the Fed now appears to be qualifying their earlier pronouncements regarding the size and timing of QE2. The market reacted yesterday with a volatile session as traders adjusted to the reality that the central bank may not be injecting $2 trillion into treasuries all at once, a prospect which in retrospect may have merely reflected wishful thinking on the part of investors…”