I would like to hear the finance experts on this board explain their predictions of what if any fallout will occur from this perpetual pumping.
They're going to start tapering regardless, where they end purchases is up in the air but I can almost guarantee that they will start tapering purchases this year. They can still buy the same amount of duration in the market while tapering as well, Treasury issuance has declined with the budget deficit and mortgage origination has dropped recently. Technically if the Fed continues to buy at the same levels then they will end up buying even more supply from the market. At the end of this year the Fed will own anywhere between 30-45% of all Treasuries maturing in over 3 years, if they keep buying at the same rate they will essentially "break" the Treasury market.
In terms of fallout, I mean we've seen several negative side effects already. Eventually when you start tapering (or actually communicate the tapering in reality) these purchases it will affect the market, and it sure as frick did in May and June. Rates blew out and liquidity was sucked out of the market, some classes like ABS went completely dry. TIPS became extremely illiquid, and emerging market got crushed to the point that Brazil even lowered their 6% tax on foreign investment to curb the outflows (which investors actually took advantage of to take more cash out). This sell-off was greatly exacerbated by the amount of leveraged and negatively convex players in the market that had forced technical selling. At the end of the day though, this was necessary. Tapering is priced in, hell I'd say even an ending to purchases is priced in and before Bernanke's speech last week a rate hike was priced into Eurodollars around the 4Q14 area. I would bet anything that at the beginning of 2015 the Fed will still have a 0-0.25% FFR target.
In terms of longer term buying, we don't really know but the close to consensus is that the Fed would continue to diverge economics from markets as has been the case the past couple years, and many would argue this would break the markets. Many would argue that it gives the ultimate blank check to politicians (and others would argue its been that way for a while). My biggest worry would be the first argument, as this year the market has lived in opposite day with economics. If you get bad numbers, people expect the Fed to continue purchases so markets go up, while if you get good numbers, markets go down as this would spur the Fed to taper purchases. Doc's analogy that I've ran with is that QE is ICU, you can't keep a patient in a comma forever. You have to bring them out and let them live again otherwise you just have a zombie. Eventually markets have to be dictated by economics.