The Federal Reserve's remarkable announcement on Wednesday that it would print $1.2 trillion to buy bonds and mortgage-backed securities will yield some short-term benefits, namely lowering rates on mortgages, credit cards, and other loans.
As justification for the move, the Fed said in a statement that: "Job losses, declining equity and housing wealth, and tight credit conditions have weighed on consumer sentiment and spending. Weaker sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories and fixed investment."
What the Fed didn't say is that the long-term risks of its actions, known as quantitative easing, are substantial. Printing money often leads to inflation, and printing large amounts of money often leads to significant inflation. (There's also the question of whether it's desirable or feasible to attempt to prop up asset prices, namely real estate.)
Fretting about higher prices -- more precisely, devaluation of the dollar -- might seem odd when stock prices, housing prices, commodity prices, and other prices have been sliding.
But inflation remains a possibility in the not-so-distant future. "The question is at what price?" wrote analysts from Germany's Landesbank Baden-Wurttemberg. "Bottom line is the Fed is adding a trillion dollars to their balance sheet. In the long run, the price for these massive rescue measures might be inflation as once the economy recovers the Fed might be not able to raise interest rates quickly enough."
http://www.cbsnews.com/blogs/2009/03/19/business/econwatch/entry4877724.shtml