Larry Kudlow
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No matter how many monetary officials try to sugarcoat it with damage control, the fact remains that the Ben Bernanke Fed wants to end its quantitative-easing bond-buying operations over the next year. That was Bernanke's statement at his last press conference, and I've seen nothing to contradict it.

As everyone knows, stocks and bonds collapsed right after Bernanke let the cat out of the bag. Fortunately, markets have stabilized since then. But my hunch is that unless the economy really falls back into a quasi-recession, the Fed is going to go ahead and end its bond purchases.

The central bank will more than likely begin to taper in September. And it will do so based on roughly 175,000 new jobs each month, which is consistent with a 2 to 2.5 percent economy.

But as the Fed implements this policy, there's going to be a lot more volatility in the financial markets, with significant downside risks for stock prices and upside potential for longer-term interest rates.

Investors beware. The second half of this year could be a bumpy ride.

Now, nobody asked my opinion on this. But I wish the Fed would leave its current accommodative policy in place, rather than taper down its quantitative easing. Why? Let me begin with the crashing gold price. Although gold has been dropping from $1,900 for a couple years now, it has fallen several hundred dollars recently to around $1,200. Gold is an important market-price signal of money policy and inflation, the latter of which has dropped to 1 percent year on year. So today's gold price is a (SET ITAL) deflationary (END ITAL) signal.

The strong dollar reinforces the gold indicator, as do weaker commodity and metal prices. They're all telling the central bank to go very, very slowly in unwinding QE.

Also, this is only a 2 to 2.5 percent economy. Market monetarists are focusing on a soft nominal gross domestic product rate, which is less than 4 percent. That's another signal that the Fed should not tighten its cash-injecting money-supply policies. As the monetarists well know, a slowdown in Fed bond buying will translate to a slower rate of growth for the monetary base and likely for M2. The falling turnover of money, or velocity, is already a cumbersome process. But Fed tightening will make this story even more difficult.

And if the Fed does what it says it's going to do, there certainly is going to be an intermediate bear market in bonds. As a rough approximation, 10-year Treasuries, which already have gone up nearly 100 basis points to 2.5 percent, will probably rise another 100 basis points to 3.5 percent. That, in turn, is going to weigh down stock market valuations. And it could well have a negative impact on the economy.

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Larry Kudlow

Lawrence Kudlow is host of CNBC’s “The Kudlow Report,” which airs nightly from 7 p.m. to 8 p.m.