Bernanke's $1.2 trillion gambit - explained:

Federal Reserve Chairman Bernanke and the rest of the FOMC decided [yesterday] to embark upon the one strategy central bankers have always considered the dreaded last option Quantitative Easing. It’s one thing for the Fed to push the “Easy” button and lower rates or temporarily inject reserves into the banking system, but to push the “QE” button (creating currency out of thin air with which to purchase assets) is an action reserved for only the direst of circumstances. If such a device truly existed in the Board room of the Eccles building, it would be a red button under glass with a “Press Only in Case of Emergency” warning stenciled underneath.

That market participants responded to this monetary jolt by buying stocks, bonds, and precious metals while thumping the dollar is not a surprise. How investors react over the longer term to these actions and the inevitable unintended consequences will be far less easy to predict.

Here's Justin Fox:

In the sense of fending off deflation, yeah, this should have an impact. But the financial world and America's position in it are more complicated than in the 1940s. We now owe lots of money to creditors outside the U.S., and when they see the Fed buying long-dated Treasuries they're bound to start worrying about what that means for the dollar. If they get too worried, they could drive up interest rates here and counter the impact of the Fed's purchases. So there are limits to the Fed's magical powers, and they already began showing up in currency markets this afternoon, with the dollar falling sharply against the euro and other foreign currencies. The adventure continues.

Free Exchange has some more reax.

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