That a hawk like St Louis Fed President James Bullard would even entertain the idea of pausing the taper is an extremely strong signal.

It’s not just about another month or two of the Fed buying $15 billion of bonds. It says that the Fed will not tolerate a hiccup in markets; that no matter what the Fed will be there.

It means that if things get worse, the Fed will go right back to QE-forever. It says they’re not interested in any kind of shakeout in risk trades or squeezing out any of the excesses in markets.

In short: The Yellen Put is on.

If the Fed actually paused the taper, here’s what to expect:

  • Dollar weakness, it’s a significant sign the Fed isn’t serious about hiking in the medium or long term
  • Commodity FX strength, money will flow into hard assets and growth-sensitive currencies
  • A bounce in emerging markets
  • Gold could benefit on fears of monetizing debt
  • Stocks forever and ever
  • The euro could actually weaken as it underscores the ECB’s unwillingness/inability to do more
  • Bonds will sell off at the long end. Even though the Fed is doing more, it cuts the risk of disinflation