There were some interesting comments from the Dallas Fed president in the FT today. He said that it was expected that the market would react strongly to the withdrawal of QE, but that it can’t go on forever. It sounds to me like the Fed is anticipating that the market will try to force them to change their mind. Mr. Market is certainly a QE junkie and will do whatever it takes to get his next fix, so maybe this dip could go further than I suggested. In the US, a booming stock market encourages consumer spending, so the Fed will have to consider the implications of a falling stock market for the recovery. However, perhaps a more significant consideration is that government bonds are also falling, with the yield on 10 year treasuries rising a quarter from 2% a month ago to 2.5% now. This is effectively the interest rate the government has to pay to both borrow new, and rollover existing, debt, and, if this continues, it could cause the government a large headache. So the Fed may well have to start buying government bonds again to reduce borrowing costs. In this battle, I feel Mr. Market has the upper hand, but the Fed is right to want to stop QE as, the longer it goes on, the more it distorts the market.