When will the Fed take the punch bowl away?

By Money Matters Editors

In the months and quarters ahead, the U.S. Federal Reserve will face, arguably, its biggest decision in the modern era - certainly its biggest choice since the early 1980s, and possibly since the 1930s. Namely - when to start to withdraw quantitative easing - cash injections that provided essential liquidity to markets to end the financial crisis.

If the Fed withdraws funds too late, it runs the risk of increasing inflation - and some say increasing it to a very high rate - like the double-digit rates last seen in the early 1980s.


Conversely, if the Fed withdraws funds too soon, it runs the risk of having the U.S. economy fall into a double-dip recession.

What's the Fed likely to do? At this juncture, unless the price of oil, which Tuesday pushed through $80 per barrel, continues to rise, and present additional inflationary pressures, the Fed will likely maintain its current maximum-easing stance, at least through May 2010. A near-10 percent U.S. unemployment rate and continued, monthly job losses will weigh against any removal of quantitative funds. If, however, for oil-price-induced or other reasons, consumer prices and producer prices start to vault ahead in Q1 2010, then all bets are off, and the Fed may be compelled begin removing intervention/stabilization funds from the financial system.