A chicken and egg scenario involving the Fed has emerged. Who is following whom?

Does the Fed Follow the Markets?

It appears that way, but if all the Fed does is follow the markets, why do we need the Fed at all? 

Fed Uncertainty Theory

I discussed the above question in detail, on April 3, 2008, before the collapse of Lehman in the Fed Uncertainty Principle.

It is still one of my favorite posts. Here are the key ideas.

The Observer Affects The Observed

Most think the Fed follows market expectations.

However, this creates what would appear at first glance to be a major paradox: If the Fed is simply following market expectations, can the Fed be to blame for the consequences? More pointedly, why isn't the market to blame if the Fed is simply following market expectations?This is a very interesting theoretical question. 

While it's true the Fed typically only does what is expected, those expectations become distorted over time by observations of Fed actions.

I liken this to Heisenberg's Uncertainty Principle where observation of a subatomic particle changes the ability to measure it accurately.

Fed Uncertainty Basic Principle:

The fed, by its very existence, has completely distorted the market via self-reinforcing observer/participant feedback loops. Thus, it is fatally flawed logic to suggest the Fed is simply following the market, therefore the market is to blame for the Fed's actions. There would not be a Fed in a free market, and by implication, there would not be observer/participant feedback loops either.