Bernanke’s economic strategy: Trillions now, worry later


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The Federal Reserve made it clearer than ever Wednesday that it’s willing to go for short-term gain at the risk of future pain.

Chairman Ben S. Bernanke and his peers at the central bank stunned financial markets by announcing two huge steps aimed at driving down long-term interest rates, including mortgage rates: The Fed said it would buy up to $300 billion of longer-term Treasury securities for its own portfolio and that it would expand its purchases of mortgage-backed bonds to $1.25 trillion from the previously announced $500 billion.


The announcements drove the yield on the benchmark 10-year Treasury note down by nearly a half-percentage-point, to 2.53%. That put it back to where it was in late January.

The stock market was thrilled. The Standard & Poor’s 500 index rallied 2.1% to 794.35. It’s now up 17.4% from its 12-year closing low reached March 9.

No question, the Fed’s moves should be a confidence-builder for the economy in the short run. Mortgage rates, already under 5%, are expected to slide further with the Fed’s help. And nearly everyone agrees that halting or slowing the hemorrhaging of the housing market is key to stabilizing the economy.

‘We are not out of the woods yet, but the Fed is working overtime to come up with new approaches to tackling this credit freeze,’ said Chris Rupkey, economist at Bank of Tokyo-Mitsubishi in New York. ‘Our forecast of a second-half recovery is on much firmer ground today.’

So, what’s the risk? As the Fed effectively pumps another $1 trillion-plus into the financial system, critics say it’s setting a time bomb for a future surge in inflation -- the classic case of too much money chasing a limited supply of goods and services.

At the moment, however, that is hardly a worry. If anything, the world faces gluts of most goods and even some services (say, investment banking). . . .


The Fed has said it plans to pull this money back once the economy is on solid footing. But some investors and traders don’t trust the Fed -- which, ostensibly, is why the dollar tumbled Wednesday against the euro, the yen and other major and minor currencies. The euro jumped to a two-month high of $1.342 from $1.301 on Tuesday.

‘By continuing to print money at breakneck speed to fund these [bond] purchases, the Fed has guaranteed that the dollar will decline,’ said Peter Schiff, head of brokerage Euro Pacific Capital and a longtime Fed critic.

Yet it isn’t clear why other currencies should get a leg up on the dollar, with most of the planet in recession. What’s more, the central banks of Japan, Britain and other countries also are buying their own governments’ bonds. The Fed is following, not leading, in this case.

And if the Fed’s efforts manage to end the recession this year, that could help, not hurt, the dollar’s standing, notes John Lonski, economist at Moody’s Investors Service.

As for the long-term inflation risk -- and the risk to the Fed’s own credibility -- the central bank has little choice but to put those concerns aside for now and focus on saving the economy from a far worse collapse, says Tony Crescenzi, bond market strategist at Miller, Tabak & Co. in New York.

On inflation, he suggests, Bernanke can afford the Scarlett O’Hara approach: ‘I’ll think about that tomorrow.’


-- Tom Petruno