Fallout: The Financial Crisis

How much more money will the Fed push into the economy?

John Dimsdale Oct 27, 2010
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Fallout: The Financial Crisis

How much more money will the Fed push into the economy?

John Dimsdale Oct 27, 2010
HTML EMBED:
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TEXT OF STORY

Kai Ryssdal: This time next week, there is going to be big news. No, not election results. You can get those any place. We are going to be talking about something ever more fascinating next Wednesday.

Monetary policy.

I know, crazy, right? How the Federal Reserve’s going to plow more cheap money into the economy. There is, as it happens, a Fed meeting on interest rates that wraps up next Wednesday. The central bank’s been dropping hints for months now that it’s going to start buying Treasury bonds again to make borrowing even cheaper and hopefully stimulating spending.

The question all along, though, is just how much cash is it going to take to do the trick. The latest word from the experts is that it’s going to be less.

Our Washington bureau chief John Dimsdale explains.


Jon Dimsdale: During the depths of the financial crisis, the Fed flooded the economy with more than $1.5 trillion. But the recovery remains fragile and the Fed is ready to try again. Some want another major boost — $1 trillion or more. But lately, some Fed members say half that much, spread out over six months might be enough.

Diane Swonk at Mesirow Financial agrees.

Diane Swonk: I do think the incremental way is the way the Fed should approach this, not committing itself too much but also opening the possibility of doing more if necessary.

The risk of going overboard is that too much money sloshing around will devalue the dollar and spark uncontrolled inflation. Moody’s economist Mark Zandi also worries that a big intervention could scare consumers and business owners.

Mark Zandi: People could get nervous and think, well if Fed has to do all of this, maybe I should be nervous too and start pulling back on hiring and spending and exacerbate the economy’s problems.

But with stubborn unemployment and hardly any lending going on, economist John Makin at Caxton Associates says the economy could slip back into recession. He thinks a big jolt is called for.

John Makin: What you hope for is if you are aggressive enough, if you put enough liquidity into the system, consumers will expect rising prices and will accelerate their purchases of goods and services.

Makin says the housing market is an example of what happens when people expect prices to fall — they wait to buy. If that spreads to other sectors of the economy, he says the Fed is going to wish it had eased credit a lot more.

In Washington, I’m John Dimsdale for Marketplace.

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