Bernanke Christens QE2: Fed "On a Very Dangerous Path," Axel Merk Says

Declaring "progress toward its objectives has been disappointingly slow," the Federal Reserve left rates at "exceptionally low" levels yet again and launched a second round of quantitative easing (QE2).
The FOMC announced plans Wednesday to buy $600 billion of Treasuries by the middle of 2011, at a pace of about $75 billion per month. That's not much in the grand scheme of the bond market, but the Fed will also continue to reinvest payments on its securities holdings; that could bring QE2's total to almost $1 trillion, a.k.a. "real money."
The Fed is on a "very dangerous path," says Axel Merk, president of Merk Mutual Funds. "The best case we can get is inflationary growth, but the downside risks are very high. [Bernanke] thinks a weaker dollar is going to stimulate the economy. Let's hope it's only a gradual decline, not a crash. "
The dollar hit a 9-month low vs. the euro in reaction to the Fed announcement but did rally vs. the Japanese yen.
Officially, the Fed's goal with QE2 is "to promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate."
Truth & Consequences
In Ben Bernanke's ideal scenario, QE2 will help keep rates low - which is presumably good for housing and corporate balance sheets - and spur further gains in the stock market and other "risk" assets, which presumably helps confidence, leading to increased business investment and hiring, a.k.a. "real" economic activity.
Merk says there's little-to-no chance QE2 will have any more success on that front than previous Fed efforts to date. "Ultimately people want to deleverage [so] this money is going to go where you have monetary sensitivity" including commodity prices, the Australian dollar and other speculative vehicles.
Meanwhile, market watchers noted the Fed's plan is to focus its QE2 purchasing power on the middle of the Treasury curve, i.e. securities from 2.5 years to 10 years. As a result, prices of shorter-term bonds rose while the price of the 30-year bond tumbled, sending its yield sharply higher.
So the real result of the Fed's action today is a steepening of the yield curve, which most benefits (wait for it)...the banks. The ability to borrow from the Fed at effectively zero and then reinvest in "risk-free" Treasury securities at a higher yield is a huge reason why bank profits rebounded so quickly from the depths of the 2008-09 crisis.
Despite loads of evidence to the contrary (and very little lending) the Fed is effectively doubling down on its bet that boosting the banks' balance sheets is the best way to revive the economy.