The printing presses are running overtime; the dollar is in peril; bonds rallied powerfully; and gold reversed course to close higher as another $1 trillion is tossed into the swamp.

The meat of the Fed’s statement follows with emphasis added:

“In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. To provide greater support to mortgage lending and housing markets, the Committee decided today to increase the size of the Federal Reserve’s balance sheet further by purchasing up to an additional $750 billion of agency mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion this year, and to increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion. Moreover, to help improve conditions in private credit markets, the Committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months^. The Federal Reserve has launched the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses and anticipates that the range of eligible collateral for this facility is likely to be expanded to include other financial assets.”

The sword hanging over bond shorts has been the threat of the Fed buying long-term bonds. Another bubble is being created without any systemic changes to the system. It’s the same story throughout modern history—when in doubt, authorities will choose inflation every time.

Stock indexes rallied after the news. Financials are reportedly higher because the “bottom is in” so screams one headline. But, it may be more likely per Andrew Wilkinson from Interactive Brokers that stocks loaned are being called-in creating a massive squeeze in Cititgroup and others.

“Intrigue continues in the June 5.0 strike options where arbitrageurs are using conversion plays that typically land a credit to take advantage of the squeeze. The volume in that line has more than 150,000 contracts trading both sides today with puts bought and calls sold when investors can position long of the stock. Earlier in the week rumors did the rounds that the authorities might be on the hunt for hard-to-borrow stock certificates in select financial names. This in itself has created a surge at AIG and Citigroup as desperate short-sellers try to cover their positions. The conversion trade could be established earlier in the week for a credit of 20 cents, but given the near-panic buying in the stock has shifted to a 1.10 cost to traders.”

Another stimulus package may also be in the works (ask Nancy) plus more bailouts down the road. It all might work to save the Fed’s client banks but it will come at a price for taxpayers and prices.

Let’s look at today’s action.