Captain Ben Charts a Treacherous Course
Another day, another surge into uncharted territory.</br></br>The Federal Reserve on Wednesday announced it will buy a further $600 billion of long-term Treasury securities. Coupled with existing purchases to keep its balance sheet from shrinking, it makes a total of $850-900 billion by the end of June. At about $110 billion a month, that is not that far off the huge monthly net issuance Uncle Sam is churning out to fund the deficit.</br></br>Strangely, the Fed's bold decision follows a period in which U.S. economic data have shown some improvement. Manufacturing activity rebounded in October, retail sales have shown surprising strength and even private-sector hiring is gradually picking up steam. Plus, there are clear risks that the Fed's action will create economic and market distortions.</br></br>Yet those received little acknowledgment in the Fed's statement. The central bank's justification for the move is that unemployment, at 9.7%, remains too high, that core inflation is too low, and that lackluster gross domestic product growth is unlikely to change that soon.</br></br>Also, having encouraged markets to factor in another bout of monetary experimentation, the Fed probably did not feel it had the option to disappoint. And Tuesday's electoral shifts made the chance of fiscal stimulus even less likely, leaving the Fed looking like the only institution with a lever to pull.