“The Fed might have a hard time tightening when it needs to, if the assets on its balance sheet have to be sold quickly and at a loss.”
“This open-ended approach to easing, contingent on an improvement in the labor market, has never been done,” Swonk notes. The times are unusual, as indicated by the headwinds still facing the U.S. economy: the federal government’s fiscal cliff, uncertainty in Europe, instability in the Middle East and contractions in state and local government.
Critics of quantitative easing ask why the Fed should act. Our chief economist points to the legal mandate, requiring the Federal Reserve to address both employment and inflation. But there are risks. Swonk warns that, “An excessive expansion in the Fed’s balance sheet could trigger new imbalances and bubbles that would need to be burst and dealt with just as the economy is healing.” Others worry, “The Fed might have a hard time tightening when it needs to, if the assets on its balance sheet have to be sold quickly and at a loss.”
For more on the Federal Reserve’s challenges in balancing persistently high unemployment with stable inflation, read this month's issue of Themes on the Economy®. Archived issues can be found at mesirowfinancial.com.
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