Now that the Federal Reserve’s policy makers have decided to print more money and buy $600 billion of government debt, market watchers are looking closely at what will happen to the U.S. dollar.
The Federal Open Market Committee (FOMC) voted Wednesday to buy $600 billion of longer-term Treasury securities by the end of second-quarter 2011, and the Fed’s intent is to create an inflationary environment by flooding the economy with new money.
If inflation happens, the economy will get a positive jolt of business activity and job creation. That, in turn, should make the dollar cheaper and reduce the cost of goods exported from the United States.
It’s a balancing act, according to Jonathan Krasney, a fixed-income specialist at Krasney Financial in New Jersey and Florida.
“The question is whether $600 billion is going to achieve the desired result,” Krasney said in a phone interview minutes after the FOMC announcement. “The Fed is walking a tightrope. One side of the tightrope is monetizing the debt and driving long-term interest rates down, which would theoretically have the impact of making money less expensive to small and large businesses and homeowners who could refinance.”
But the other side of that is fear of inflation, he said.
“The concern is that by in effect printing $600 billion to go into the system, the Fed is cheapening the value of the dollar,” Krasney said. “Theoretically, they’re going to aid exports from the U.S., but it’s a tightrope.”