The Fed's Battle Plan

The Federal Reserve has learned from the past and is taking on the current economic crisis in an aggressive fashion. Fed Chairman Ben Bernanke is one of the nation's foremost scholars on the Great Depression and is using his expertise to head off the threat of deflation. The fear on the flipside is inflation. All the extra liquidity being pumped into the system may cause inflation to spike as the economy comes out of the current recession. While this is a legitimate fear, pulling the economy out of the current crisis is what is necessary in the short run.

Here's what Business Week has to say out the Fed's current battle plan:

Will the new battle plan work? Most likely yes—eventually. The Fed's monetary weaponry, in combination with the fiscal artillery of the incoming Obama Administration, are so potent that if they are used to their full extent they can almost certainly generate an economic recovery, potentially starting in the second half of 2009. The problem is that today's all-out attack on recession may well generate a surge of unwanted inflation in 2010 or after. But the Fed seems to regard that as an acceptable price to pay to avoid disaster now...

Most economists think that inflation is the last thing the Fed needs to worry about right now. According to New York University economist Mark L. Gertler, who collaborated with Bernanke on research during the Fed chief's Princeton years: "We are in an incredibly dangerous situation. Now is the time to be aggressive. There's no danger of inflation. It's almost insane that people are talking about it now." Even with all the Fed's heroic measures, predicts Merrill Lynch (MER) senior economist Drew Matus, "the recession is going to be a long one, and the recovery is not going to be a big one."

One reason for optimism—mild optimism, anyway—is that Bernanke has learned from the mistakes committed by the Fed during the Depression and the Bank of Japan during that nation's Lost Decade of the 1990s. In 1999, when he could afford to be undiplomatic, Bernanke asked in a book he contributed to whether Japan's monetary policy was "a case of self-induced paralysis," and he praised President Franklin D. Roosevelt's "willingness to be aggressive and to experiment."