Upon occasion, we’ve quoted John Dizard of the Financial Times, who seems terribly plugged in and is unfailingly interesting. His latest piece included a succinct summation of the Fed’s situation and his take on what it will do:
The real issue has been the excess liquidity created by the central banks through a decade of ever-more ambitious crisis management. The risks created by those “solutions” were not identified, let alone measured, by their econometric models. Now they have to conduct a credit triage by supporting sound and essential borrowers, so we can get something closer to the mythical soft landing. The inflationary risks of massive liquidity provision later can only be reduced, not eliminated, by selective direct purchases of good paper, directly or indirectly, by the Fed. My bet would be that they do just that. Already, we’ve seen the discount rate cut as well as the preferential purchase of mortgage-backed agency paper over Treasuries in their open market operations. This is necessary but probably not sufficient. The question is how long the Fed delays taking more direct action and, therefore, how much more inflationary risk will be introduced.