Fed's Next Task: Reeling In Lifelines
As Recession Eases, Expanded Lending Could Stoke Inflation
By Annys Shin
Washington Post Staff Writer
Tuesday, May 26, 2009
As if the worst recession since World War II, the near collapse of the financial system, and the prospect of double-digit unemployment weren't enough to deal with, the Federal Reserve now has something else to worry about: success.
Lately, a steady stream of economic data has suggested that while the economy is still shrinking, the pace of the decline is slowing. That, in turn, has stoked fears that the Fed's efforts to steer the economy away from a 1930s-era depression would push the country toward '70s-style inflation.
Those fears center on the Fed's unprecedented efforts to revive the economy by creating more than $1 trillion in new money. Determining the best time to withdraw that money is a classic quandary for central bankers. The challenge of timing is even more daunting than usual this time because the Fed has become so integral to shoring up the financial system. As Fed leaders ponder their next move, analysts say they may have to choose between propping up credit markets today and fighting inflation tomorrow.
It typically takes at least six months before the Fed's decisive policy shifts translate into economic activity. So if the Fed wants to forestall inflation from getting out of its ideal range of around 2 percent, it will probably have to act while unemployment remains high and before the financial sector is completely healed.
(More here.)
By Annys Shin
Washington Post Staff Writer
Tuesday, May 26, 2009
As if the worst recession since World War II, the near collapse of the financial system, and the prospect of double-digit unemployment weren't enough to deal with, the Federal Reserve now has something else to worry about: success.
Lately, a steady stream of economic data has suggested that while the economy is still shrinking, the pace of the decline is slowing. That, in turn, has stoked fears that the Fed's efforts to steer the economy away from a 1930s-era depression would push the country toward '70s-style inflation.
Those fears center on the Fed's unprecedented efforts to revive the economy by creating more than $1 trillion in new money. Determining the best time to withdraw that money is a classic quandary for central bankers. The challenge of timing is even more daunting than usual this time because the Fed has become so integral to shoring up the financial system. As Fed leaders ponder their next move, analysts say they may have to choose between propping up credit markets today and fighting inflation tomorrow.
It typically takes at least six months before the Fed's decisive policy shifts translate into economic activity. So if the Fed wants to forestall inflation from getting out of its ideal range of around 2 percent, it will probably have to act while unemployment remains high and before the financial sector is completely healed.
(More here.)
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