Fed speakers such as Dudley and Kocherlakota may be thinking that they are spurring confidence by telling investors that the Fed is in no hurry to hike and that monetary policy will remain accommodative until economic data signals a change. But by doing so, they are only emphasizing the tentativeness of the recovery, the potential sensitivity to rate hikes, the possibility of negative shocks from abroad, and the view that full normalization remains years away according to Citibank .

The market takeaway from their comments has been that the US economy is not strong enough to stand on its own, leaving little hope for the rest of the world, which is already slowing.

According to economic theory: CPI * real GDP growth velocity * money supply/base.

Looking at St. Louis Fed's, "Velocity Of M2 Money Stock" it is currently at a new record low at 1.531 (Q2), with the velocity of the monetary base at around 4.3 according to Deutsche Bank. This means that every dollar in the monetary base was spent only 4.3 times in the economy during the past year, down from between 15-17.5 in the 10-15 years prior to the recession.

Clearly, easy money policies have exhibited the classic diminishing returns patterns and the market is smart enough to not buy into this again. The fire power of major central banks is all but over. Central banks will be coming to a gun fight with knives if things get worse from here on.

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