Bernanke - stay the course, let the bubble grow

Chairman Bernanke signaled that the low interest rate policy of the Fed will continue. There will be no change at the Fed in the near-term. Buy equities and bonds and sell the dollar. Any monetary overhang is gone especially if unemployment is not moving down and inflation is under control. He also commented on the dollar which is usually the territory of the Treasury.

According to Chairman Bernanke,

"We are attentive to the implications of changes in the value of the dollar and will continue to formulate policy to guard against risks to our dual mandate to foster both maximum employment and price stability," the Federal Reserve chairman told the Economic Club of New York.

"Our commitment to our dual objectives, together with the underlying strengths of the US economy, will help ensure that the dollar is strong and a source of global financial stability."

So how are we gong to get a strong dollar if the official policy is to stay the course with low rates?

What are the implications of staying the course? There will be a asset bubble in Asia. It has already happened and will continue. Buying dollars means that domestic money will increase.

At a conference in Singapore, Hong Kong chief executive Donald Tsang—a former finance minister—said Friday he's "scared" about loose U.S. monetary policy. "Where is the money going—it's where the problem's going to be: Asia," Mr. Tsang said. "You can see asset prices going up, not only in Korea, in Taiwan, in Singapore and in Hong Kong, going up to levels that are incompatible or inconsistent with the economic fundamentals."

On Saturday, China's top banking regulator, Liu Mingkang, chimed in that the Fed's binge is the main cause of "massive speculation." The risk is more asset bubbles and misallocation of global capital.

From WSJ

The global monetary imbalances will continue. While this may not be the mother of all carry trades, it will be one big speculative bubble.