Fratto: The Fed Surprise

While Washington was fully engaged in its ritualistic circular firing squad in the AIG bonus debacle, the Federal Reserve shocked markets yesterday by committing a badly needed act of competence.

The announcement that the Fed would begin to purchase long-term Treasuries and mortgage-backed securities will have a real impact on the economy — especially by supporting demand in the weak housing sector.

The move does come with some risk, of course: with this much quantitative easing, inflation could become a concern (although the deflation story was always over-sold). And we'll want to keep an eye on the dollar.

But market participants in recent weeks had just about given up hope that anyone in Washington could deliver an effective policy response to the ongoing crisis.

It has become clear that the stimulus bill and the Obama Administration's housing plan will deliver less than advertised. Details of the second TARP plan remain to be announced a month after the initial mangled rollout. The Administration is still lagging badly in appointing senior Treasury officials. And potential TALF partners are concerned about "Washington clawback risk" — even more so now in light of the AIG mess.

The atmosphere in Washington has become so poisonous with respect to Wall Street that many market participants are afraid to get on the Acela train to DC. (All aboard! Next stop: Witness Stand.)

So the Fed announcement came at a time when fear of Washington is highest, and confidence lowest.

There's still a lot to fear from Washington right now, but the Fed's aggressive and creative use of its balance sheet showed that someone in Washington can still deliver.


Tony Fratto is a CNBC on-air contributor and most recently served as Deputy Assistant to the President and Deputy Press Secretary for the Bush Administration.