Adaptation

The adaptive expectations theory and the rational expectations theory hypothesize that market participants form opinions on future fiscal or monetary policy and its potential impact on the market. For example, if the market participants expect the Federal Reserve to end QE2 as planned, the market may sell off on weak data as the stimulus is currently required to keep the US equity, currency and bond markets stable. In other words, monetary and fiscal policy tend to cause some posturing, like we are currently seeing, in anticipation or expectation of certain events like a continuation or cessation of large scale treasury purchases by the Fed.

Will the Fed continue to stabilize the treasury market by purchasing 2 to 10 year debt with new created dollars, even after QE2 officially ends, I would have to say, of course they will. Will the FOMC be vocal about this, not initially.

Bernanke, who spoke today about the dwindling "recovery," has been opaque as usual nearing the end of QE2, he must be in order for the future policy to have any large scale effect due to these rational and anticipated expectations many are just waiting to jump on the interpretation of the chairman's words or actual news of what the Fed will do next to keep the great ship afloat.