WASHINGTON (Reuters) – The Federal Reserve is risking inflation after doubling the size of the U.S. monetary base and will face tough choices if prices start to rise before a recovery begins, according to a study by a regional Fed bank.
The U.S. central bank has massively boosted the monetary base, which includes currency in circulation and bank deposits held at the Fed, in an effort to support markets during the most severe financial crisis since the Great Depression.
"Inflation does not appear to be a risk in the current environment: the economy is in recession. Inflation is falling and is not expected to return before the recession ends," according to an essay in the March/April edition of Review magazine, published by the Federal Reserve Bank of St. Louis.
"If inflation resumes but the economy does not recover, policy-makers will face a difficult choice. Monitoring the size and composition of the monetary base will help us understand what actions are needed," the study said.
Emergency measures to flood credit markets with cash to stop them freezing in panic over bank losses doubled the size of the Fed's balance sheet and boosted the monetary base to around $1.7 trillion.
Fed officials agree they need an exit strategy to soak this money back up once the recession ends. They don't think it is an inflation risk right now because banks are still too scared to lend the extra money out in a way that would boost the broader money supply and lead to higher prices.
In the meantime, they must save the economy from an even more severe downturn, and argue that programs used to boost credit markets can be allowed to expire as the recession ends.
Critics warn it will be politically very hard to pull the plug on some of these support measures if financial markets remain under strain, possibly forcing the Fed to water down its commitment to keep prices low and stable while supporting the economy.
Billionaire investor Warren Buffett on Monday praised the efforts of the Fed to stimulate the economy but cautioned the measures could lead to an inflationary cycle worse than the one that followed the 1970s oil shock.
they doubled the money supply. National GDP has not grown. Your dollar is about to become half as valuable, if the recovery starts or not. Maybe a year or two?
Oh God, that is rich. That is ENTIRELY what the gooberment has been trying to do, raise house, stock, share, commodity prices. Right this minute. Of course prices are going to rise, way way before the 'recovery'. This is what is going to pull the financial chestnuts out of the fire. (Naturally poor, working, modest income people will have to take it in the neck, but frankly, what are the masses good for if not dumping a big steaming pile of tax, price, debt crap upon?)
One could argue that oil is down because of the global recession. Or, one could argue that Oil is a deflation beater like it was last summer at $145 or, one could argue that there isn't enough money left in the world to fiddle with oil prices at all, or, one could just argue!