Is The Fed Cruising Toward A Monetary Cliff?
Posted 12/14/2012 07:12 PM ET
The Fed: As Ben Bernanke digs in, we start to wonder about his exit strategy. Has he really found a way to print trillions of dollars in new money without a disaster down the road?
The Federal Reserve this past week continued its ongoing debate with the late Milton Friedman, who famously held inflation always had its roots in money — i.e., too much of it.
It detailed a program of bond-buying, involving both Treasury securities and mortgage-backed securities (MBSs), that will swell its balance sheet and probably continue for at least two more years. The goal, as before, is to hold interest rates at or near zero.
The Fed will stay the course until the jobless rate drops to 6.5% or year-over-year inflation rises to 2.5%.
It will carry out this plan by essentially printing money — lots of it. The Fed has added some $2 trillion to its balance sheet since the end of 2008 (putting it at about $2.9 trillion, see chart) as it creates new bank reserves to buy bonds.
Its new program includes purchases of $45 billion in Treasurys and $40 billion in MBSs each month, which would boost its balance to $4 trillion by the end of 2014.
In the old days, this would lead to a burst of new lending and much more money in circulation. This time, the Fed has managed to avoid doing this — in essence, stuffing most of its new money into a very large mattress.
For instance, it pays interest to banks that entices them to park their excess reserves in its coffers, rather than lending more to consumers and business.
And, for now at least, Ben Bernanke & Co. don't face great political pressure to juice the economy with more easy credit or to serve up a bit more inflation to help the government deal with its debt.
How long can this last? The economy continues to sputter four years into the Fed's near-zero interest rate regime. Meanwhile, the U.S. government soaks up the global supply of credit with its insatiable borrowing.
The Fed has to hope the economy gets healthy soon, and that Washington, fiscally speaking, gets religion. Then it can push interest rates and its balance sheet back to a normal range without a crisis.
But if these good things don't happen, the U.S. could be headed over a monetary cliff — hyperinflation or a brutal hike in interest rates — that makes the present "fiscal cliff" look tame in comparison.
Read More At IBD: http://news.investors.com/ibd-editorials/121412-637260-fed-keeps-printing-money-without-inflation.htm#ixzz2F8ijEjOI
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