Fed's quantitative easing timetable is the big $2 trillion question

Posted Oct 20th 2009 4:30PM by Joseph Lazzaro
Filed under: Federal Reserve, Recession, Financial Crisis

MarketWatch Chief Economist Irwin Kellner sometimes boldly goes where no man has gone before, to cite an old Star Trek phrase, and this week he evaluates the U.S. Federal Reserve's dilemma.

And what a dilemma it is: regarding quantitative easing policy, if the Fed withdraws its record cash injections too soon, it could trigger a double-dip recession, Kellner said. Conversely, if the Fed withdraws funds too late, inflation could re-heat. As part of its quantitative easing policy, the Fed's balance sheet has swelled to more than $2 trillion from about $869 billion in 2007.

Hence, Kellner adds, the hard part of Fed Chairman Ben Bernanke's job – when to withdraw funds - is about to begin: the easy job was flooding the U.S. economy with money.

What will Bernanke do? Kellner said it's inconclusive at this juncture: the price of oil and gold are signaling that the world has too many dollars, but long-term unemployment levels and a just-started U.S. economic recovery argue against a withdrawal of funds at the present time.

Monetary Analysis: The timing of the withdrawal of quantitative easing may represent the Fed's most difficult policy decision since the 1930s; it's certainly the most difficult since former Fed Chair Paul Volcker's extended monetary tightening in the early/mid 1980s to wring double-digit inflation out of the U.S. economy. The view from here argues that, assuming oil does not return to its stratospheric, leverage-fed, roughly $150 per barrel level reached in 2008, inflation should remain tame enough for the Fed to main quantitative easing through the end of Q2 2010.

Tags: Bernanke, inthenews, Irwin Kellner, monetary policy, quantitative easing