Spending bills in Congress get far more attention–and opposition–than Federal Reserve Bank decisions about expanding the Fed’s lending, but they both put the American public on the hook ultimately. And on Wednesday, the Fed announced plans to expand its balance sheet dramatically by pumping another $750 billion into mortgage-backed securities and $300 billion into purchasing long-term Treasuries (WSJ, NYT).
The latter move is one the Fed has been fretting over for some time, since it was first broached publicly in a December 1, 2008 speech by Fed chair Ben Bernanke. In effect it’s a pure money-printing action, and it’s already caused the dollar to drop in value. In itself that’s not a bad thing, at least as far the U.S.’s mammoth trade deficit is concerned. But the decision is sure to add to the chorus of critics at home and abroad who claim that the government’s attempted cure for today’s deflationary pressures will result in a crippling bout of inflation tomorrow.
The Fed’s balance sheet–its outstanding loans, that is–has more than doubled since the onset of the financial crisis last fall. Back then, it stood at about $900 billion. Now it’s $2.1 trillion, and that’s to say nothing of programs like TALF, which the Fed hopes to use to target up to an additional $1 trillion to specific sectors such as the auto industry, credit cards, and education and small business loans. Bloomberg’s Scott Lanman writes that the total could more than double by September, to the vicinity of $4.5 trillion.