Tom Keene Talks to James Bianco

You have the quote of the week on the Fed: "This is not a perpetual motion machine." Is that what the Fed thinks it has built?
They would like us to think that they have a perpetual motion machine. If they pump enough liquidity, they are going to force markets higher. We are going to feel better, and we are going to get past this problem. It will work until we get worried that it is going to create inflation, and I think that is going to come later this year, maybe early next year. And then it will become an anchor around the banks' necks.

You mean core inflation, right? We are already seeing headline inflation in food and gasoline.
I do think it will come in core inflation. And then when they realize they have so much liquidity, plus the Bank of Japan, plus all of the other central banks, they won't be able to pull it back fast enough. And then all this liquidity, which is a virtue now, will become a vice later.

The Fed came under criticism earlier for keeping interest rates too low for too long. Are you suggesting we are heading that way again?
I think already it is well under way. Since the stock market crash of 1987, the response to any type of perceived problem by the Fed and by a lot of central banks has been to ease—and when you get to zero, then start printing money. They tend to overdo it, because they view the alternative of doing nothing, or doing too little and letting markets fall a lot, as much worse.

    Before it's here, it's on the Bloomberg Terminal.