THE FED?S TOUGHEST JOB LIES AHEAD! September 25, 2009

curve it had to cut rates 13 times, not stopping until June 25, 2003, when it was finally satisfied the economy was recovering from the 2001 recession.

So with its next job made so much more difficult by the unusual conditions created by this massive financial crisis, recession, and bailout effort, it does have tough work ahead, in even determining when it should begin unwinding the stimulus, let alone how to do it.

Obviously acting too soon would risk sending the economy back down into a double-dip recession. Yet, leaving the massive stimulus conditions in place too long would almost surely result in runaway inflation.

As Fed Governor Warsh said on Friday, “The stakes are high. . . . We are in a critical transition period of still unknown duration. . . .Judgments made by policy makers in the current period are likely to be as consequential as any made in the depths of the panic.”

The stock market may be sensing that uncertainty, having been decidedly uncertain itself almost from the minute of the Fed’s FOMC statement on Wednesday.

Sy Harding is president of Asset Management Research Corp, publishers of the financial website www.StreetSmartReport.com, and the free daily market blog, www.syhardingblog.com.

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