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.

Financial Times columnist Martin Wolf reminds investors that, contrary to some views expressed in the United States, depressions are neither good for us, nor unavoidable.

Further, despite the recent year's many reverberations, the United States remains, Wolf argues (and the U.S. Central Intelligence Agency agrees), the world's preeminent economy in the global economic system it has created and promoted. Moreover, U.S. policy errors had much to do with the current crisis, even if aided by policy errors abroad. By extension, the healing and recovery starts in the U.S. -- with America as the leader of determined, globally-coordinated action.

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.

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.

With the U.S. economy in recession and getting weaker by the month, and with the financial system stabilized but credit conditions hardly ideal, the United States over the next few months will embark on policy initiatives that are likely to be historic.

Both fiscal and monetary policy will be used. The incoming Obama Administration is expected seek approval from the new U.S. Congress of a record $700-$850 billion fiscal stimulus package. Meanwhile, the U.S. Federal Reserve will continue with its quantitative easing plan, including $500 billion in purchases of mortgage/asset-backed securities instruments as part of its effort to improve credit market liquidity.

The need for stimulus: incontrovertible

The above initiatives will forward a pair of numbers that some Americans will undoubtedly find hard to imagine, let alone accept: a budget deficit for this year and the next of at least $1 trillion and a Fed balance sheet rising past $2.5 trillion. Most economists argue that the actions are needed to jump-start a U.S. economy that shows almost no signs of pulling out of its deepest and longest recession in decades: corporate earnings are forecast to decline, job losses continue at an alarming rate, with unemployment rising.

Those investors, including market absolutists, who interpret the current economic state-of-things as just a typical downturn that a few tax cuts and some good, old-fashioned, free market-based supply side economics can solve, may want to stop reading the economic data points in the months ahead. At least, that's the view of one economist.

Nouriel Roubini, the once obscure New York University economics professor, who two years ago predicted the current global financial crisis and recession, said the worst is still ahead for the U.S. economy and for economies around the world.

"In the next few months, the macroeconomic news and earnings reports from around the world will be much worse than expected," Roubini wrote in a column for Bloomberg News, adding that the aforementioned will put downward pressure on prices of risky assets.

Further, Roubini said the U.S. economy will remain in recession through at least the end of 2009, with only a mild recovery starting in 2010 -- with GDP growth in the initial recovery year of 1%. For 2009, Roubini also forecasts continued recessions for the United Kingdom, euro zone, Japan and Canada. Russia will also fall into recession, as will Brazil, and China will experience a hard landing, with growth slowing to 5%, he said. India's economy also will slow substantially.

U.S. policy makers are putting all hands on deck. All engines are being used to pull this train out of the station. In this case, nearly every cliché applies.

The Federal Reserve Bank of New York announced Monday it has started buying mortgage backed securities (MBS), as part of its $500 billion program to improve credit market liquidity and jump-start the housing market.

The Fed said it began buying MBS guaranteed by Fannie Mae (NYSE: FNM), Freddie Mac (NYSE: FRE), and Ginnie Mae. Purchase amounts will be published on the Fed's web site beginning January 8 and will be updated each Thursday.

Goldman Sachs Asset Management (NYSE: GS), Pacific Investment Management Co., and Wellington Management Co. will manage the $500 billion in MBS the Fed expects to purchase by June.

There's been no change in the U.S. economy's pulse, according to the most recent GDP data from the U.S. Commerce Department.

The U.S. economy contracted at a 0.5% annual rate in Q3, the Commerce Department announced, in its final reading on the quarter. The rate was unrevised from the previous estimate, but it was the weakest quarterly growth rate since Q1 2001.

Economists surveyed by Bloomberg News had expected the economy to contract at a 0.5% annualized rate in Q3.

One danger sign for the economy: consumer spending, which accounts for 60-65% of U.S. GDP, declined at a revised 3.8% annualized rate in Q3, worse than the 3.7% annualized decline estimate announced earlier.

Economist David H. Wang said the final Q3 GDP was a wash. "GDP came in as expected, but we can see the clear, continued drop in consumer spending, which is indicative of a prolonged recession," Wang said. "So it's stimulate with glee, to make the recession flee."

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).

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."

What should investors focus on when the U.S. Federal Reserve announces its interest rate decision Tuesday at 2:15 p.m. EST?

The amount of the cut in short-term interest rates? No. A rate cut in its benchmark rate of 50-75 basis points from 1% is all but assured, given the recession.

The Fed's statement on economic conditions? Typically, the statement would be parsed by economists and analysts, and they'll watch for some change in tone, but, really don't expect any revelations in the top part of the statement. Economic conditions are poor, almost across the board, and have been so for a while, so Wall Street is not likely to read anything it doesn't already know about the major economic indicators.

Fed's new tool box

Rather, investors should look for any clues the Fed might provide regarding continuing use of non-traditional methods, i.e. the Fed's 'new tool box,' including quantitative easing. In its last statement, the Fed identified "extraordinary liquidity measures" as one official step that was strengthening the financial system. If the reference to extraordinary liquidity measures is retained, there's a decent chance there's more quantitative easing up ahead, if economic fundamentals do not improve.

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.

These days, investors large and not so large are following the financial markets more closely than they have perhaps in decades. Is the U.S. recession worsening? Are there any more problematic banks? Is the market bottoming? There's a lot to assess, particularly if you have a 401K.

In times like these investors/readers turn to the likes of Warren Buffett or George Soros to analyze the financial and economic state of things.

However, today we turn to another trusted source, for time-tested counsel, advice, and wisdom: Lawrence Peter 'Yogi' Berra, retired Hall of Fame catcher for the New York Yankees, owner of 10 World Series championship rings and author of 'yogiisms' - - incisive malapropisms that reveal eternal truths.

Those who know Yogi know that his northern New Jersey home is accessible via two different routes, starting from a fork in the road. Hence, when Yogi gives directions to his house he says, "When you come to the fork in the road, take it."

Yogi's adage applies to economics, as well. When you come to the (economic) fork in the road, take it.

The United States is coming to an economic fork in the road, of sorts: it can get to its destination - - economic recovery - - by one of two paths.

The first would involve primarily using the Federal Reserve and quantitative easing. The Fed has already said it will purchase more than $600 billion of private debt, including commercial paper, mortgage-backed securities, and other asset-baked securities. (In order to cover potential losses associated with the Fed's purchases, the U.S. Treasury has set aside $20 billion in TARP funds authorized by Congress.) However, while additional quantitative easing in the aforementioned commercial segments (especially mortgage-backed securities) may trigger an increase in economic activity, such as an increase in mortgaged-based home purchases, it may not represent the segment where the Fed wants the extra growth to be.

If you're concerned about inflation heating up in the months ahead, that's the wrong problem to focus on.

Despite a large and increasing federal budget deficit and $8.2 trillion in obligations (loan, loan guarantees, investments, monetary liquidity actions) aimed at ending the credit crunch, deflation -- not inflation -- remains the primary concern for the U.S. economy, at least though 2009.

Deflation is dreaded

The above may appear to be a misread, but it's not after reviewing the data, so says economist David H. Wang. Core U.S. inflation, which excludes food and energy prices, is running at a 2.2% annual rate; overall inflation at about a 3.5% annual rate, he said. Both are likely to trend lower as the recession continues in 2009.

"Housing and commodity prices have fallen by large amounts. Stocks prices are at low levels, from a valuation standpoint. Businesses have no pricing power, and there is no wage pressure. In this environment, prices are more likely to fall than rise," Wang said.

U.S. Federal Reserve Chairman Ben Bernanke Monday provided the markets with his latest -- and strongest -- hint about new plans to counteract both the credit crunch and the U.S. recession. Now it looks like the Fed may buy Treasury notes and bonds, and/or agency bonds, in an effort to push interest rates even lower and "spur aggregate demand."

"Although conventional interest rate policy is constrained by the fact that nominal interest rates cannot fall below zero, the second arrow in the Federal Reserve's quiver -- the provision of liquidity -- remains effective," Bernanke said in a speech Monday in Texas. "The Fed could purchase longer-term Treasury or agency securities on the open market in substantial quantities. This approach might influence the yields on these securities, thus helping to spur aggregate demand."

Fed deploying unconventional tools

Bernanke's comments are the Fed's latest hint that the world's most powerful central bank will deploy a 'new tool box' and unconventional techniques that Bernanke has previously said most likely would be needed to help the nation cope with its most serious financial crisis since the Great Depression.

Moreover, although the potential actions announced Monday technically are not quantitative easing, they will have that effect, says economist David H. Wang. Quantitative easing involves increasing the reserves in the banking system after the Fed loses the ability to lower the cost of money from an interest rate standpoint.