The Federal Reserve Open Market Committee (FOMC) issued its statement almost exactly as expected. The language on interest rates is remaining low for an extended period of time remained largely unchanged, and the decision was unanimous.

As I have mentioned earlier, the Fed continues to avoid any potential language which could disrupt the financial markets. Any potentially controversial ideas seem to be reserved for speeches by the Chairman and other government officials.

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.

Why would the government want a weak dollar? To get some perspective on the dilemma facing the Fed, let's go back to the Clinton years. During the 1990s, we had a booming economy. That booming economy fostered a strong dollar policy (i.e., strong economy equals a strong dollar).

Now the tables are turned and we are in the worst recession since the 1930s. We are mired in debt and our unemployment keeps rising. The housing market, while improving somewhat, is still in shambles. Banks are short of money to lend, keeping a lid on expansion, and on and on. So then we have the reverse of the 1990s.

Investors received yet another indicator Monday that this is not your father's recession.

The global economy will likely contract in 2009 for the first time since World War II -- including a decline in trade - - the World Bank announced in its most recent report.

The U.S.'s first fiscal stimulus package 'of size' since the recession's start has passed - - albeit in a modified form that decreased spending by about $140 billion over the original outline.

Further, the young President Barack Obama, like the young President John F. Kennedy, has learned that presidential honeymoons can be short inside the beltway, particularly if you have to trade policy to obtain votes both inside your party and among the loyal opposition.

Meanwhile, investors and the financial community more broader await the specifics pertaining to Obama administration's revised plan to stabilize the banking system, with the declining Dow discounting that even a successful plan will require months of systemic adjustment, and, of course, more public funds.

The nutshell on the 2009 World Economic Forum held in Davos? It was a conference where nearly everyone agreed that the financial crisis started in and is primarily the result of U.S. policy errors, but agreed on little else after that.

Further, the Davos gathering produced almost no new insights regarding the nature of the crisis beyond what is already known: that excessive leverage throughout the system, arcane and in some cases Frankenstein-like derivatives, inadequate national-level financial regulation, and the collapse of demand, set in motion first the U.S. recession, then the credit crunch, then the global recession.

With its benchmark and new, short-term interest rate already in its 0-0.25% target range, investors are expected to concentrate on the U.S. Federal Reserve's statement and any information (or clues) it may provide about both the U.S. economy and the central bank's quantitative easing policy.

Further, Fed officials are also considering a revision of the central bank's forecasts so that they include periods beyond three years, Boomberg News reported Tuesday. The Fed will release its statement Wednesday at 2:15 p.m. ET.

Economist Peter Dawson told BloggingStocks he, and probably many other economists, will be looking for any Fed commentary / analysis of its quantitative easing strategy.

Readers of this space know that a preferred tactic, stemming from the graduate school years and schmoozing with economists and policy wonks is to 'take the other side in an argument' or 'argue the alternate point-of-view.'

Well, one argument forwarded by economic conservatives, market absolutists and others is that the proposed fiscal stimulus package will be 'inflationary' and that it 'won't stimulate the economy.'

Arguing to the contrary...

Economist Peter Dawson took up the above argument, but only because BloggingStocks required him to do so (Ah, the power of the press!).

"A stimulus package that's both inflationary and that won't stimulate the economy," Dawson said. "Hmm? The logic is a little curious here, because inflation implies that there's demand and economic growth, and a failure to stimulate the economy implies there's very little demand and hence very little or no economic growth. The conclusions contradict, so what do the economic conservatives say the stimulus is going create, demand or no demand? I'll leave it for them to clarify their argument."

The impossible has happened. The Chicago Cubs won the National League pennant?

No, ECB President Jean-Claude Trichet is now in accommodation mode.

Trichet, a legendary inflation hawk, presided over the European Central Bank as it cut its benchmark interest rate by 50 basis points to 2% Thursday.

It was fourth consecutive monthly interest rate cut for the ECB and it matches the record low interest rate reached during the 2003-2005 period. However, Trichet, at the ECB's regular post-meeting news conference, indicated monetary policy makers will avoid a cut in interest rates at its next meeting in February, Bloomberg News reported Thursday.

Economist David H. Wang said there's a bright side and a downside to the ECB's most-recent action, and he isn't so sure the bank is done cutting rates, even with a prospective February pause.

Can the U.S. government run $1 trillion budget deficits for two, three years? Indeed it can, Financial Times columnist Martin Wolf argues, and the deficits can even be higher, for a while. After that, there's more work ahead.

The specter of $1 trillion budget deficits may be vociferously opposed by Republicans and other economic conservatives, but Wolf, in so many words, says what other choice does the United States have? What would be the alternative? Simultaneously raising taxes now to lower the deficit? Hardly prudent. Doing nothing? Another dreadful idea. So, it's prime the pump, or sit there at the well and await nothing.

Up ahead: two bigger tasks

What's more, Wolf sees two additional tasks (structural changes) that are just as important to the goal of U.S. economic recovery -- but that may be even harder to implement: removing toxic assets from the banking system and reducing the U.S.'s structural current account deficit (the trade deficit).

The first is the forced write-off of bad assets, fiscal recapitalization of the banks, or debt-for-equity tactic, and it should be done comprehensively and quickly. Slow, gradual bad-debt reduction is not the correct policy, Wolf argues, as it would delay the economic recovery.

Two internationally known economists converged Tuesday on a common point regarding the link between stimulus and the U.S. economy's recovery -- but from different vantage points.

U.S. Federal Reserve Chairman Ben Bernanke, in a speech before the London School of Economics, said fiscal stimulus won't be enough to create a lasting recovery, unless it is accompanied by strong measures to stabilize the financial system.

Meanwhile, New York Times economist Paul Krugman underscored the need for both a large fiscal stimulus capable of providing an immediate boost to the economy and providing stimulus 18 and 24 months out.

In a CNBC interview Tuesday, Krugman underscored the need for a large fiscal stimulus -- a critical mass of fiscal stimulus, if you will -- to counteract the massive amount of stimulus taken out of the economy from declines in consumer spending, business investment, home price depreciation, constrained credit by banks, and stock market declines.

Krugman added that the $700-850 billion proposed fiscal stimulus package is too small. Earlier, in his column in The Times, Krugman said both shovel-ready and longer-term infrastructure projects were required to keep a lid on rising unemployment for the next two years.

In most locales around the world, the New Year is a cause for a celebration.

But how about a new year celebration combined with the birthday party? Talk about a celebration.

When the new year dawns, Europeans will be doing just that - - at least Europeans in the euro zone: that's because the euro currency turns age 10 on January 1, 2009.

Euro has strengthened Europe

When launched January 1, 1999, 11 nations comprised the euro zone: Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal, and Spain. Later, Cyprus, Greece, Malta, and Slovenia joined, and Slovakia will become a member on January 1, 2009 to bring euro zone membership to 16.

Further, while some critics still denounce the euro as 'paving the way for end of Europe's broad social safety net' the euro currency has basically achieved its goals, with enormous benefits for Europe's citizens and visitors, so says economist Peter Dawson. The euro traded at $1.3890 Wednesday morning.

The U.S. Federal Reserve is reaching into its 'new tool box' to use quantitative easing to help jump-start the U.S. economy from it worst recession in decades, and it begs the question: is there a limit to amount of money the Fed can create?

"That depends," economist David H. Wang told BloggingStocks. "There are very few case studies for quantitative easing, and there is not a consensus on what is the maximum amount of money available."

Money: it makes the world go round

Quantitative easing involves increasing funds in the financial system after the Fed loses the ability to lower the cost of money from an interest rate standpoint. Basically, the Fed adds cash by purchasing Treasuries, agency debt, and if the need arises, other asset-backed securities, hoping that some of that money will be lent or otherwise deployed in commercial operations.

The Fed's balance sheet has surged to $2.3 trillion from about $924 million in September, when the first wave of the financial crisis began to freeze credit markets and decimate stock markets around the world.

Moreover, the Fed's balance sheet is likely to increase as other interventions become necessary to stabilize the financial system. For example, the Fed is on the hook for up to another $240-$265 billion as a result of the rescue of financial services giant Citigroup (NYSE: C).

Global credit markets have recovered and stabilized following a brush with a global financial meltdown in September, but those markets have not normalized and a tough stretch of road remains ahead, so says an economist.

"We are on 'a great, long, slow journey' to use a Chinese saying," economist David H. Wang told BloggingStocks. "We have to be prepared for more bumps in the road ahead in 2009. We must be both proactive and also take corrective action in the credit markets."

Short-term interests have fallen considerably in the past three months, with the London rate for three-month loans in dollars (LIBOR) declining Friday to 1.50% from 4.82% earlier this fall, Bloomberg News reported, primarily on the strength of $8.4 trillion in liquidity-oriented interventions by the U.S. Federal Reserve and the other, major central banks.

The LIBOR is particularly important because it determines rates for $360 trillion of financial products worldwide, from home loans to derivatives.

Central banks: on the watch for credit stress signs

What could represent one of those 'bumps,' i.e. a re-igniting of short-term rates, in Wang's view? Another wave of home mortgage foreclosures, which would lead to another batch of toxic-bonds, write-offs, and financial institution stress, he said. The aforementioned "underscores the urgency of the Obama Administration and Congress passing a major home mortgage refinance plan for preventable foreclosures," Wang said. "If we stem the rise in mortgage foreclosures, we will make progress on the road leading to economic recovery."

U.S. Federal Reserve Chairman Ben Bernanke, formerly a tenured professor of economics at Princeton, is universally acclaimed as one of the leading scholars on the Fed's response to the Great Depression.

In that sense Bernanke is uniquely qualified to be Fed chair now. Economists argue: who better to have at the helm during the financial crisis - - the U.S.'s most serious financial and economic challenge since the 1930s - - than Bernanke?

The logical song

Economist David H. Wang obviously sees the above logic of the Bernanke-1930s study nexus, but poses an even better question: should Bernanke follow a 1930s-analysis recovery script or try alternate tactics? Wang is mostly in the latter camp.

"We have learned lessens from the Fed's failures during the 1930s and most of the remedies are applicable to today. Today, the Fed's implementing an expansionary monetary policy and its intervention to save institutions critical to the financial system are chief among them," Wang said.

"On the other hand, today's economy differs vastly from the 1930s. There is no precedent for decreased demand for copper in China causing a cessation of mining operations two weeks later in a U.S. mine, for example. The speed at which commercial and credit conditions can change was something the 1930s Fed did not have to deal with," Wang said. "So Bernanke and today's Fed not only have to make quicker decisions, they have to be ready to change those decisions quickly, and implement entirely new tactics, if needed. That argues against using a play-by-play, 1930s-analysis recovery script."