Financial markets come early in this causation chain; and they are a critical element of the transmission mechanism that the Fed is pursuing.
No wonder the price of virtually every asset class rose following the policy announcement. In the U.S. stock market alone, the Fed helped engineer that day a $400 billion burst of "wealth" gains. The valuation surge is even larger when you include international equities, commodities, and corporate bonds.
This is not the first time that financial investors benefited from the Fed's actions. Since the 2008 global financial crisis, the central bank has aggressively used its balance sheet at least three times explicitly to boost asset prices. And, at least on paper, this round -- or "QE3" -- is even more powerful than the previous ones.
It is open ended. It is focused for now on just the mortgage market. And it is accompanied by a commitment by the Fed to maintain its foot on the policy accelerator well into the process of economic recovery.
But wait -- the Fed is not in the business of making investors happy. Its mandate is to maximize employment and maintain price stability for society as a whole. So, how likely is it that the financial sector's good fortune, prompted by the Fed, will end up providing the means to meet this dual objective?
This is where there are legitimate questions and concerns, and not only on account of the outlook for the next five years but also well beyond.
The Fed's hyper-activism, including venturing much deeper into experimental and unfamiliar territory, is neither cost free nor riskless. It critically depends on securing immediate broad-based benefits that overcome our economic malaise and change the momentum of the economy. Otherwise, it is very difficult to justify the real and present danger of collateral damage and unintended consequences.
If this big Fed bet does not work out, our generation will become even more divided and our children's generation will be left with the burden of cleaning up an even bigger economic, financial, political, and social mess.
So, how should you think of this delicate balance of potential outcomes?
First and foremost, recognize that as hard as it tries and as well intentioned as it is -- and I have no doubt whatsoever about both -- the Fed does not have the complete tool set to deal with our country's three basic problems: too little growth, too much debt in the wrong places, and too polarized a political system.
The answers to these challenges lie elsewhere in Washington, DC. If the Fed remains the only responsive policymaking entity -- as has been the case for way too long already -- it is only a matter of time before the costs of its activism overwhelm the benefits.
Second, internalize the likelihood that consumers and companies will face higher commodity prices than would have been the case otherwise. At the same time, as the Fed suppresses further interest rates, retirees will have even less real income on which to live.