In a bit of a surprise, the Federal Reserve’s Open Market Committee voted 11-1 to continue its program of buying $85 billion worth of federal and mortgage bonds in order to continue stimulating the economy. It had announced in June that it would begin cutting back on these purchases by the end of the year and many expected it to begin doing so today.
Both Paul Krugman who wrote earlier this week, “Memo to the Fed: Please don’t do it” and the financial markets, which love low interest rates, are happy. The S&P 500 index hit a new high on the news.
By buying these bonds, the Fed is, in effect, creating money, almost $1 trillion a year in new money. Since the financial meltdown in 2008, the Fed has created many trillions of dollars trying to stabilize the economy and then revive it. At some point it will have to begin to reduce and then reverse its bond purchases and get that money back into its capacious vaults lest a virulent inflation break out.
The timing will be tricky, to put it mildly. Too quickly and it could throw the economy back into recession. Too slowly and we could be back to the 1970′s, with double-digit inflation.
Let’s hope they get it right.