Moves like a butterfly; stings like a bee...

Fed Chairman Ben Bernanke is a contender. His latest one-two combination may well be enough to put this match to bed. In his continuing effort to battle the tenacious credit crisis, the FOMC announced today the following measures:

  • It will buy up to $750 billion more of agency mortgage-backed securities (total purchases this year could be as much as $1.25 trillion (that's with a "T");
  • It will buy up to $100 billion more of agency debt (raising the Fed's total appetite to as much as $200 billion);
  • It will purchase up to $300 billion of longer-term U.S. Treasury securities over the next six months.

I know some people will think this policy is crazy. (It certainly is bold!) And some will worry that this policy is inflationary--but that's the Fed's point: We need policy that would otherwise be inflationary to fight off the growing world-wide deflationary pressures.

Bernanke gets no argument from me on that point. For now, the Fed is right on track. Bernanke's next big decision will be when to call it a match. If the Fed keeps pushing liquidity after the crisis abates, that's when we will have an inflation problem.