Excerpts:
"The Federal Reserve, aiming to pull the U.S. out of its recession, is in the early stages of pumping money into the economy. But the central bank is increasingly being forced to confront what happens at the end stages, when it must unwind its programs as the economy recovers.
"The Fed last week announced it would pump up to $1.15 trillion more into the financial system by buying Treasury bonds and expanding its purchases of mortgage debt. But the huge injections of money into the economy, if left in place, threatens to spur a bout of inflation as spending picks up and unemployment falls.
"... While the government debt will be easy to unload when the time comes, it still could disrupt markets and push some borrowing costs back up more quickly.
"Ending the Fed purchases of Treasurys, when the economy is recovering, "could result in the mother of all bond bear markets," said Alan Ruskin, a strategist at RBS Greenwich Capital. The result "is another example where ameliorating the extent of the downturn is paid for with a weaker eventual recovery," he said.
"The central bank's other interventions, geared toward specific sectors, will prove more difficult to unwind. The Fed has committed to buying up to $1.25 trillion of mortgage-backed securities, enough to satisfy half the nation's home-loan demand this year. Selling that off, even years after an epic housing bust, would likely come against strong opposition from the real-estate industry, which wants low mortgage rates.
"Each of the portfolios will have its own constituencies -- in markets and governments across the country -- that could pressure the Fed not to pull back too quickly, or ever. With each of those programs, the Fed faces the risk of becoming more entangled with political authorities -- undermining its role in setting interest rates.
