Should the Federal Reserve Continue Quantitative Easing with QE3?

The economic recovery is still on shaky ground and Ben Bernanke is concerned it may lose its footing. In order to help bolster the economy, Bernanke instituted an easy money policy at the Federal Reserve. He lowered interest rates and increased the amount of money the Federal Reserve invested in Treasury Bonds. The Federal Reserve's massive stimulus plan was expected to end this summer, but the recent economic news has led to speculation that QE3 may soon begin. Do you think the Federal Reserve should continue its strategy of quantitative easing?

Advantages

Depending on your perspective, the argument for continued quantitative easing has both pros and cons. Here are a few proposed advantages to continued government support: 1. Lower Interest Rates The Federal Reserve Board has worked hard to keep the discount interest rate below 1%. A low interest rate environment makes capital more accessible to banks, and ideally, to individual consumers and businesses. Many banks have used the low interest rate environment to get access to cheap capital which they have then used to increase profits. Unemployment may be high, but corporate earnings have been solid. Many companies have been able to thrive in the face of low demand for their products or services due to low borrowing rates. 2. Real Estate Support The Federal Reserve has provided substantial support to the real estate market by buying mortgage backed securities. Bernanke's plan was to invest $600 billion dollars in mortgage backed securities and United States Treasuries. The money invested helped to stabilize these markets at a time when they appeared to be in free fall. But the mass exodus of the Fed from these markets could lead to further weakness therein, whereas continued easing could help provide a stopgap until the economic recovery is in full force.

Disadvantages

There are also serious drawbacks to massive governmental stimulus. High inflation and limited options may be two of the gravest concerns: 1. High Inflation Inflation is the big worry that economists are discussing. Precious metal prices are at record highs because investors are concerned with inflation due to excessive spending by the Federal Reserve. The price of gold has topped $1,550 per ounce and the price of silver is back above $36 per ounce. The fear is that history may repeat itself as high metal prices have historically been a precursor to high inflation. If the Federal Reserve maintains its easy money policy, then the economy just may face a hyperinflationary environment. 2. Lack of Options The Federal Reserve will exhaust its options if it engages in another round of quantitative easing. If we hit another recession, the Fed would be unable to act since interest rates are already low and cannot get much lower. Further, the balance sheet of the Federal Reserve is already over-expanded and could not support another massive money injection into the economy should a subsequent crisis occur. Now you can see why Bernanke has such a difficult decision on his hands. He has to do just enough to keep the economic recovery on track, but not too much so as to impede it. Do you think Bernanke should have another round of stimulus? Mark Riddix is an investment management pro who often shares his wealth of knowledge at Money Crashers, a personal finance resource and website covering topics like choosing the best investment options, saving for retirement, and getting out of debt. Mark writes a weekly column for Benzinga.