The current act of the Federal Reserve’s money printing festival ends this month. Thus a big buyer of US Treasury securities substantially disappears. Suppose Senate, House, and White House performers do not enact a significant deficit cutting package. Assume no amazing economic growth magically eliminates much of the near term or long run shortfall. Will American individuals and institutions leap at the chance to boost their acquisitions of these low yielding bills, notes, and bonds? Absent “flight to quality” fears, probably not. The same is true of overseas players.

Judging from recent foreign buying patterns of US Treasury securities, it then will be difficult to attract sufficient foreign ownership to fill America’s fiscal hole. In the absence of another round of quantitative easing, or unless the US (and worldwide) economy weakens substantially, US government interest rates will face pressure to rise.

Associated with its quantitative easing and interest rate policies, the central bank sentinels have unleashed rhetoric concerning their talent in managing the process, particularly the unwinding. When if ever, and how fast, will it disgorge its vast supply of securities? Thus Fed quantitative easing has a counterpart in qualitative easing. Fed oratory indeed strives to inspire confidence in the Fed’s monitoring skill, its determination to keep inflation expectations well-anchored, its trusty and ready-at-hand toolkit, and its ability to smoothly implement appropriate exit strategies.

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After QE2- Easy Does It? (The Money Jungle, Part Three)