With the U.S. economy undergoing a recovery that is so slow that it feels like no recovery at all, Fed Chairman Ben Bernanke announced that his group was very likely to keep taking action to help the sluggish economy along. Bernanke is set to give a speech at the annual central bank conference in Jackson Hole, Wyoming this Friday and will likely downgrade the official Fed outlook for the economy. That said, it is unlikely that he’ll do anything drastic to move things along.
Said Millian Mulraine, an economist with TD Securities, "With the recovery grinding to a halt in the first half of this year and the economy operating perilously close to a second recession, the Fed will remain on guard against a negative surprise on growth, and will be willing to act accordingly." With interest rates already so low that they really can’t go down any further, it’s likely that the Fed would likely turn to its own balance sheet to effect change.
The last time the Fed took such action, a round of bond purchases totaling $600 billion and referred to as "QE2," signaling a second round of "quantitative easing," was not very successful and, in reality, simply amounts to printing money. With inflation concerns in the modern day, the approach of printing money is certainly not without risks. Back in the first two rounds of quantitative easing, inflation was not as much of a concern, but now if the Fed makes such a move that leads to inflation – and that move doesn’t spur the economy – the dreaded instance of "stagflation," last seen during the presidency of Jimmy Carter, would occur.
If we’ve learned anything during this economic crisis, it’s that President Obama doesn’t want to hear any more comparisons to that beleaguered former president, so one must wonder just how much money the Fed may be willing to print this time around. A more likely scenario is that the Fed simply keeps its $2.8 trillion balance sheet intact for longer than expected, just as it has done with the low interest rates.
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