Probable Big Challenge For The Fed

In the absence of strongly stimulative fiscal policy to create economic demand and
employment, I have been a supporter of a large QE program from the Fed to promote
some growth and keep us from a deflationary recession. As we move in to 2014, the
latest QE program will have added about $1 tril. in liquidity support to the financial
system. Fed Bank Credit Chart The latest very large QE program has been heavily
offset by restrictive, anti - growth fiscal policy with the latter undercutting potential
demand growth. With more scrapping to come on fiscal policy as 2013 wears down,
QE may have to be extended into next year. I do not think the Fed thought such would
be necessary when it kicked off the latest initiative. Moreover, I also believe that
continuing the program for more than another few months will find the Fed in a position
where it will become increasingly difficult to conduct a well balanced monetary policy
where liquidity excesses can be trimmed without rather painful results for the economy
as well as for the markets. Because it may well be necessary to provide additional direct
liquidity support over the next five or so years, the wiser course for the Fed may be to trim
the very large current program in favor of a dramatically milder one and to aggressively
pursue pushing the President and the Congress to adopt growth fiscal policies if and as
needed. The Fed needs to get this message out there so the media can develop pro - growth
storylines to challenge the rest of official Washington. Such lobbying by the Fed will
create ire in DC and threats of retribution, but this necessary challenge by the central bank
will leave them in a better managerial position long-term.

The Congress has ignored the economic realities to play to their respective constituencies
while counting on the Fed to bail them out on growth. It has not worked very well and it
is high time for the Fed to call the Congress out on it by fostering challenges from the public
on the eve of an off year election. Since Bernanke is the short timer, it would be best for him
to step up and warn emphatically that the Fed can no longer shoulder this burden alone.