A third possibility is that the Fed intentionally reduces the monetary base, gradually moving interest rates higher as Plosser suggests. This is undoubtedly the best course, in my view, but it's important to recognize that there are already substantial risks baked in the cake as a result of the Fed's recklessness up to this point. The first 25 basis points will require an enormous contraction of the Fed's balance sheet. Risky assets have already been pushed to price levels that now provide very weak prospective returns. Our 10-year annual total return projection for the S&P 500 remains in the 3.4% area. Expected returns for shorter horizons are near zero or negative, but are associated with greater potential variability. Commodity prices have been predictably driven higher by the hoarding that results from negative short-term interest rates (if you expect inflation, but interest rates don't compensate, you have an incentive to buy storable goods now, and this process stops when commodity prices are so high that they are actually expected to depreciate relative to a broad basket of goods and services, to the same extent that money is expected to depreciate).

In short, the outcome of the present situation need not be rapid inflation, and need not be steep market losses. Rather, the predictable outcome is instability. If you put a brick on a flagpole, and keep raising the flagpole and adding more bricks, you don't have the luxury of predicting when the bricks will fall, or in what direction. What you do know, however, is that the situation is not stable. People may briefly be rewarded for standing directly below, cheering, while branding anyone who keeps their distance as fools or worse. But if you look closely, those cheerleaders are typically hiding enormous welts, scars and gashes from being repeatedly smacked over the head - if you look even closer, you'll find that they have typically thrived no better for it over the long-term. While it's possible to continue without unpleasant events, the Fed has already placed the course of the economy, inflation, and the financial markets beyond a comfortable scope of control should surprises emerge.

Eoin Treacy's view Investor focus is currently on the effects QE2 is having on various risk assets. However over the medium-term, the USA and other countries such as the UK face a considerable challenge in sterilising stimulative measures, while avoiding recession and containing inflation.

The US Dollar has taken the brunt of concerns about the USA's fiscal position and lack of agreement on how to tackle it. John Hussman assumes the Fed will choose to minimise inflationary pressures as it unwinds stimulus. However, history would suggest that governments faced with intractable debts tend to choose a weaker currency and adopt an inflationary bias to mitigate the pressures of such a burden.

The Dollar weakened further this week when compared to the G7, Asian and Latin American currencies. While oversold in the very short-term, a significant rally would now be required to suggest Dollar demand is returning to dominance.