Fallout From Freewheeling Fed?

There’s no doubt that 2008 will be remembered as the year of the Fed. The central bank’s actions have been nothing short of historic.

Following are just some of the unprecedented moves Ben Bernanke and company made to counter the financial meltdown. (There are many more. Click here to see them all.)

--March 16: The Fed provides a $29 billion loan to JPMorgan Chase & Co. as part of its purchase of investment bank Bear Stearns.

--Sept. 16: The Fed injects $85 billion into the failing American International Group, one of the world's largest insurance companies.

--Oct. 7: The Fed says it will start buying unsecured short-term debt, so-called "commercial paper," from companies, and says that up to $1.3 trillion of the debt may qualify for the program.

--Oct. 14: The FDIC says it will temporarily guarantee up to a total of $1.4 trillion in loans between banks.

-- Dec 16: The Fed cut its target on federal funds, the overnight interbank loans that form the floor rate for U.S. lending, to just 0.25%, down 75 basis points from the previous 1.0% level.

-- Dec. 16: With rates now close to zero, future moves to bolster the economy will have to come via other methods. The central bank said it plans to extend its program of buying government-backed mortgage bonds, which should have the effect of reducing mortgage rates.

How great will the fallout be from the Fed’s unprecedented actions? And are we setting ourselves up for terrible inflation?

According to Former Federal Reserve Governor Lyle Gramley the short answer is no. “The worry for 2009 is not inflation it’s deflation. There’s a potential problem (of inflation) down the road but not now.”

Gramley goes on to tell the gang that the Fed must be permitted to do everything necessary to turn the economy around. He feels they can expand the balance sheet now and then shrink it back down later.

What’s the bottom line?

“I think the Fed is going in the right direction,” concludes Gramley,

To see our entire interview with Lyle Gramley please watch the video.

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