THE RESET: Fed forges ahead with easy-money policy

THE RESET: While much attention is on 'fiscal cliff' battles, the Fed chugs ahead

Associated Press
THE RESET: Fed forges ahead with easy-money policy
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FILE - In this June 9, 2010, file photo, Federal Reserve Chairman, Ben Bernanke, right, listens with president of the Federal Reserve of Richmond, Jeffrey Lacker, left, at J. Sergeant Reynolds Community College in Richmond, Va. With an eye on the “fiscal cliff,” the Federal Reserve is expected to announce a new bond-buying plan to support the U.S. economy on Tuesday, Dec. 11, 2012. Lacker has said he thinks the job market is being slowed by factors beyond the Fed's control and he says further bond purchases risk worsening future inflation. (AP Photo/Steve Helber, File)

As President Barack Obama and Congress agonize over strengthening the economy without fattening the $16 trillion national debt, the Federal Reserve chugs steadily along on its own course of keeping interest rates low and printing money to stimulate growth.

The central bank's impact on the economy is huge. Yet it doesn't get as much attention as the fiery White House-congressional battles over the "fiscal cliff," taxes and spending.

The Fed is a hybrid — part government agency but also an arm of the banking system. That unusual arrangement helps insulate it from being buffeted by strong partisan winds.

Fed policy makers on Wednesday decided to keep aggressively buying Treasury and mortgage securities to keep the U.S. economy growing into the new year and until labor markets improve.

It's called "buying" bonds, but the purchases are mostly done with money created out of thin air — one of the Fed's singular powers.

It's risky. The flood of new money from the Fed and other central banks can touch off inflation and even trigger another financial crisis.

But so far, inflation is being held at bay by a weak global economy.

And interest rates also remain low, including 30-year mortgage rates averaging 3.4 percent, one of their lowest levels ever.

Before the recession the Fed's "balance sheet" was about $1 trillion. Now it's $2.9 trillion, headed for $3 trillion.

Republican nominee Mitt Romney had vowed to replace Fed Chairman Ben Bernanke. Romney's loss gives the former Princeton economist more running room.

Still, Bernanke — first appointed by President George W. Bush in 2006 — has hinted he may step down when his term expires in February 2014.

While the threat of inflation from too much money-printing remains, the Fed can quickly reverse the process by raising rates, selling its bonds and electronically erasing the proceeds. That would contract the money supply and ease inflation pressures.

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