Fed understands fiscal stimulus but not its own operations

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Glad they are getting up to speed on fiscal.

Sorry to see they are still out to lunch on the ramifications of their balance sheet.

The Fed on Stimulus: Seems To Be Helping

Fiscal stimulus — the tax cuts and spending increases passed by Congress to boost the economy – isn’t the province of the Federal Reserve, but fiscal policy affects the economy and monetary policy has to take it into account.

When the Fed’s policy committee — the Federal Open Market Committee — convened Aug. 11 and 12, the topic came up. ”A number of participants noted that fiscal policy helped support the stabilization in economic activity, in part by buoying household incomes and by preventing even larger cuts in state and local government spending,” the just-released minutes of the meeting record.

“Participants generally anticipated that fiscal stimulus already in train would contribute to growth in economic activity during the second half of 2009 and into 2010, but the stimulative effects of policy would fade as 2010 went on and would need to be replaced by private demand and income growth,” the Fed added.

But that’s not the only risk. “Participants noted concerns among some analysts and business contacts that the sizable expansion of the Federal Reserve’s balance sheet and large continuing federal budget deficits ultimately could lead to higher inflation if policies were not adjusted in a timely manner,” the minutes noted.