Although not so clearly explained by the central bank, Fed officials undertook these unprecedented steps in some measure to ward off what they like to call an “adverse feedback loop.” 

That isn’t a term from a heavy-metal concert. Instead, it is one of the quickest ways an economy can stumble and fall. Sharp declines in asset values puts pressure on banks and financial institutions, which are then forced to sell assets and cut back lending. This puts downward pressure on the economy as a whole, and starts the cycle all over again.

The Great Depression was an example of an adverse feedback loop.

In a breakfast speech on the economic outlook, Yellen said that the recent improvements in financial markets have lowered the odds of such a negative event. “[I] am encouraged by what I’ve seen both from the economy and financial markets to believe we’ve really minimized the odds of that dark scenario,” she commented.

A sharp drop in home prices remains “one of the biggest risks facing the outlook” and “one of the key questions going forward,” according to Yellen.

“The truth,” says Andrew Gordon in Investor’s Daily Edge, “is employment isn’t holding up well. And prices aren’t being held down too well. Mark my words. These employment figures will also be revised upwards.

“What seasonality giveth, it will taketh away… come June. These very important inflation and job numbers will not merely slip. They could very well drop drastically. Wall Street won’t like that. If crude prices remain well above $100 by then (as I think they will), it will be damning evidence that the Fed couldn’t, after all, finesse its way out of the twin threats of no growth and rising inflation.

“This is my contrarian take. While most economists and brokerages have been predicting a 2nd-half comeback for the economy, I believe it’s going to begin a major leg down. Depression/recession, crisis, runaway inflation, a new bear market, and Fed impotence will be Wall Street’s new battle cries. It won’t be pretty.”

James Montier agrees with this bearish outlook, in John Mauldin’s Outside The Box, saying we are in a “sell in May and go away” summer.

The latest bad economic news was good because, as has become the norm, it was less bad than predicted. The Commerce Department reported retail sales fell 0.2% in April, after a 0.2% gain in March. Better than the 0.3% drop economists projected. Over the past year, sales were up 2%, matching the slowest growth in five years.

But wait. “The U.S. dollar skyrocketed on the report because excluding autos, sales actually increased,” noted Kathy Lien, of DailyFx.com.

Meanwhile Fed members were out on the rubber chicken circuit. Dallas Federal Reserve President Richard Fisher told an audience in Midland, Texas that he had “absolute confidence over time…the dollar will be strong again.”

And San Francisco Fed President Janet Yellen said that, “My forecast is the most likely outcome over the next couple of years is that total and core inflation will moderate from present levels.”

At the same time, though, Gentle Ben Bernanke warned that the financial sector remains severely stressed. Bernanke said that the Fed’s cash infusions, while having met with some success, have not achieved their goal of stability, and that “financial markets are still far from normal.”

Source: Dollar Surges Against Euro

Federal Reserve policy makers, sensing both renewed inflation dangers and a possible economic boost from government rebate checks, may be nearing a pause in interest-rate cuts after the fastest reductions in two decades.In remarks this week, Fed Governor Kevin Warsh, San Francisco Fed President Janet Yellen and three other district- bank presidents voiced concerns about rising prices. Harvard University economist Martin Feldstein, who for almost 30 years has headed the group that decides the dates of recessions, called for an end to Fed rate cuts.

Investors are increasingly taking such talk, along with economic data and company earnings, as signs that the Fed will leave interest rates unchanged for the rest of the year after a quarter-point move on April 30. The central bank has already lowered rates three times this year, to 2.25 percent.

“There’s a whole lot of ‘flation’ going on.” says Bill Bonner. “The de-flation takes the air out of housing and the financial industry; the in-flation gasses up commodities, gold and oil. Together, they are re-adjusting the U.S. economy (and, to a lesser extent, the United Kingdom and other Anglo-Saxon economies) downward…reducing the value of assets and labor (more about that too…keep reading), but also reducing the value of their debts. This is fine with us…it’s just capitalism at work.”