While controversial, the Federal Reserve's aggressive monetary policy, called Quantitative Easing 2 (QE2), has certainly been nice for investors. Not only have equities surged, but so have commodities. Nice, huh?

But according to Bill Gross, who manages the world's largest bond fund (Pimco), things may get turbulent when QE 2 ends in June. After all, where will the next big catalyst come from?

After two years of steadily rising commodity prices, Federal Reserve chairman Ben Bernanke finally admits to it. Quoted in Bloomberg/Businessweek in his testimony before Congress Bernanke said: "Sustained rises in the price of oil or other commodities would represent a threat both to economic growth and to overall price stability, particularly if they were to cause inflation expectations to become less well anchored."

"We will continue to monitor these developments closely and are prepared to respond as necessary to best support the ongoing recovery in a context of price stability."

There is talk among some members of the Federal Reserve about whether we should have more inflation to spur the economy. This is a hot button. If you push it, you can start a fire that cannot be put out. That was the case in the 1970s when inflation ran rampant and interest rates shot up to 18%. Fed chairman Paul Volcker managed to put that fire out, but in the meantime the economy was thrown into a severe recession.

Fast forward to the present. The Fed has an unofficial inflation target of 1.5% to 2%. Fed members Dudley and Evans are of the mind to let inflation float above these levels for a time, and then bring it back down. They expressed their views in the Wall Street Journal.

Today's Beige Book was effectively ignored because Ben Bernanke's testimony defended the low-rate or no-rate policies that left no concern of a Fed rate-hike rush any time soon. EIA weekly inventories showed a surprise for the bullish case based on draw downs and T. Boone Pickens called for $95 oil... And earnings are so far up in most of the DJIA components.

Here were the unofficial closing bell levels:

Dow 11,123.11 +103.69 (0.94%)
Nasdaq 2,504.86 +38.87 (1.58%)
S&P 500 1,210.65 +13.35 (1.12%)

Top Analyst Calls
Top Day Trader Alerts

The market was down most of they day and it looked might it sell off more into the afternoon. That was until the Federal Reserve issued its Federal Open Market Committee for the meeting held on March 16. The Fed's message was that rates would stay at their historically low levels and would stay there for some time.

The rally after the FOMC announcement was modest, but at least it let traders continue their modest assault on the DJIA 11,000 level.

Almost on cue, a member of the U.S. Federal Reserve has balanced Fed's quarter-point discount rate interest rate hike last week to 0.75% with a statement Monday that the Fed should keep interest rates very low for a while.

San Francisco Federal Reserve Bank President Janet Yellen, in a speech Monday at the University of San Diego, said, "For the time being, the economy still needs the support of extraordinarily low rates."

Yellen added, "I'm not at all convinced that a V-shaped recovery is in the cards."

Thursday evening the Federal Reserve Bank hiked the emergency loan rate for banks from 0.50% to 0.75% effective Friday, surprising some market participants. The Fed is trying to wean banks off some of the cheap made available during the worst of the financial crisis. But this is also a tightening of monetary policy while the economy is still weak.

The Feds main discount rate remains unchanged -- somewhere between 0 and 0.25% -- so this new hike should not have a big effect on consumers.

Under the radar: Some trends are obvious enough and visible to all investors. Others are more subtle, but are just as potent, and these often slip 'under the radar.'

Case in point: As Senate leaders molded a late coalition to secure the reappointment of U.S. Federal Reserve Chairman Ben Bernanke to a second term as Fed Chair, the Princeton University economist and Great Depression scholar received public backing from an unexpected source: European Central Bank President Jean-Claude Trichet.

Senator Russ Feingold, D-Wisconsin, announced Friday he will vote against U.S. Federal Reserve Chairman Ben Bernanke's re-nomination, Reuters reported, even as chatter surfaced that Senate Leaders may fall short of the 60 votes needed for the re-appointment to clear procedural hurdles. A vote on the re-nomination is expected next week.

As it stands now, the reappointment will likely require Republican votes to pass, and to-date since the start of the Obama presidency, that's been an uncertain proposition, to say the least.

It appears members of the U.S. Federal Reserve's board of governors are becoming more confident about the U.S. economy's ability to hitting a critical -- and required -- phase: self-sustaining growth.

On Monday, Kansas City Fed Bank President Thomas Hoenig said the Fed should end purchases of mortgage-backed securities because the market is "healing," Bloomberg News reported Friday. Also, Philadelphia Fed Bank President Charles Plosser said Tuesday the recovery is "sustainable even as the fiscal and monetary stimulus programs eventually wind down."

A key Fed policy maker sees the U.S. economy continuing to recover in 2010, but not at a "gangbuster" rate.

Dennis Lockhart, president of the Federal Reserve Bank of Atlanta, in a speech Monday before the Downtown Atlanta Rotary Club, said U.S. GDP growth will continue in 2010, but will not be strong enough to lower unemployment substantially.

Yesterday's Federal Reserve can be viewed in two parts. First we have the restatement of the Fed's low interest rates, by keeping the Fed Funds rate at 0 -- 25% for an "extended period."

It repeated that economic activity was improving. Specifically, housing and consumer spending were up a bit. The unemployment picture, while still weak, is showing signs of bottoming.

But this is not the real news. In a detailed statement the Fed explained how it would exit its emergency programs. It said that it would still buy $1.25 trillion dollars of agency mortgaged backed securities and $175 billion of agency debt. What is significant is that it will terminate these programs during the first quarter of 2010. This is the first piece of hard news from the Fed since these programs began.

The Federal Reserve Open Market Committee (FOMC) issued its statement indicating again that interest rates will remain low for an extended period of time. The decision was unanimous.

The Fed continues to avoid any potential language which could disrupt the financial markets. Chairman Bernanke, a student of the Great Depression, does not want to do anything to damage the current stabilization in the economy.

All is not well in paradise. Producer prices rose 2.4% in November. While this the first gain this year, the size of the jump was much more than expected and the highest since October 2008. At than time we were coming off record oil prices. Analysts had expected a meager 1.6% rise, a surge in energy prices in the past month contributed to a much higher rise.

The Federal Reserve is meeting today and tomorrow. The Fed will then issue its policy statement on interest rates. It is expected that interest rates will remain low. All eyeballs are on whether the Fed will still include the words: "Extended period."

The U.S. economy lost only 11,000 jobs last month. The unemployment rate fell to 10%, from 10.2% Good news, right?

For the Federal Reserve, the new set of variables spells confusion for its stated policy: Interest rates will remain low for an "extended period."

Now the Fed is getting closer to the day when it will raise interest rates. While one month of low jobless numbers is not sufficient to say a trend has started, it will certainly bear upon the policy statement at the Fed meeting on December 15-16.