Some People Can See the Future: "Fed faces trap as it frets over withdrawal from QE"

We collect prognostications but this is one I missed. The writer is US Markets Editor for the Financial Times in New York.
From Michael Mackenzie at the Financial Times, January 9, 2010:

...No matter how bulled up the equity market becomes, should data improve, the Fed is likely to remain very cautious, mindful that it needs to keep the bond market happy.

Becoming the buyer of last resort in the past year resulted in the Fed crossing an important line in the bond market.

The exit from QE is always going to be messy, unlike the relatively simple act of raising the overnight target interest rate. It leaves policymakers hoping that talk of extending QE will help contain rates from rising too quickly and save them the trouble of actually buying more bonds.
The danger, however, is that the bond market seeks a resumption of buying. A lot of easy money was made on Wall Street bond desks last year thanks to the Fed's buying. Can you blame dealers for not wanting to see that party end?

This potentially leaves the Fed trapped, for any sign of a recovery in the economy will be accompanied by rising rates, which in turn threaten sustainable growth and could well shake the equity market.

To prevent such a scenario, it is very likely that the Fed will reinforce its role as the buyer of last resort.

All which entails that the eventual end of QE will be a messier affair than perhaps many investors care to think. And one that bodes ill for the dollar and US fiscal policy down the road.

HT to ZeroHedge for the link.