According to the Federal Reserve, driven by a rebound in housing, the U.S. economy is expanding. The Associated Press has the story.

Indeed, according to The Associated Press, U.S. foreclosure filings are at a 5-year low.

CBIZ compares the two presidential candidates’ tax policies. The Wall Street Journal also has a comparison.

Reuters reports the Standard & Poor has cut Spain’s debt rating to near-junk status.

Inflation

Speculation on the amount abounds as different sides of the new measures talk about risks, benefits and possible pitfalls. Today Richard Fisher, president of the Federal Reserve’s Dallas branch said, “We have seen a sharp rise in inflation expectations. If you let this get out of hand, then I think we will have a market reaction,” underscoring a central problem in the bank’s new policy. With such large amounts of securities being purchased, and essentially new money being injected into the economy, inflation is a chief risk of the policy.  Current goals at the Fed have remained at 2 percent per year inflation, but this new open-ended policy places that goal in jeopardy, according to dissenting opinions.

Future Withdrawal

Though inflation may be one of the largest risks of the Fed’s new policy, one that may be just as dangerous and is certain to happen is the future withdrawal of the invested funds as the bank’s assets mature. As the bank buys securities and assets, those assets inject funds into the economy, but once those assets have reached maturity and the bank is forced to reclaim the lost funds, it will be removing capital from the market. The Fed cannotsimply leave the funds it has invested in the economy; instead those same funds which were meant to spur growth will now act as an anchor as private banks are forced to pay out. There is no doubt that the Fed will try to spread this process out over a significant period of time to ease the pain of removing capital, but in 2010 when the Fed halted its QE1 program, markets slipped during thesummer, and the Fed was forced to return to the program with QE2 and Operation Twist. Between now and the time when we have the “improved” conditions laid out by the Fed, a plan for steady withdrawal, as not to damage gains made, will have to be carefully crafted and executed so institutions and banks who have counted on QE since 2008 do not fall without it.

$85 billion a Month

Since 2008 QE has been purchasing a wide array of securities in order to help reduce short and long-term interest rates. The idea has been to spur economic growth by placing capital in banks and financial institutions that then could lend that capital to borrowers (corporations, businesses, new home owners etc.) at a much lower interest rate. But, after four years of the unprecedented purchasing program, unemployment is still above eight percent, we are $16 trillion in debt and net household income has remained nearly stagnant at 2008 levels. Now we are doubling down on a program which may or may not be helping the economy at a higher rate of $85 billion a month when including the Fed’s long-term purchasing program, Operation Twist. In fact, private banks are even having trouble organizing paperwork in order to process the purchases by the Fed, in part due to new regulations on the banking industry.

After all is said and done the unprecedented policy could help to improve economic conditions, but at what risk? Following Bernanke’s own advice, the real course of action is for Congress and the administration toaddress huge fiscal issues facing the country. A national debt of $16 trillion, a federal budget deficit of over $1 trillion, looming tax increases and the sequester all make up the fiscal cliff, which the Congressional Budget Offices says threatens to drop us back into recession. It is time for politicians in Washington to put economics before politics and take action, because while QE3 may not work, at least Bernanke is trying.

The Hill and Politico report negotiations about the “fiscal cliff” are getting more serious. USA Today says investors are already taking the “fiscal cliff” very seriously.

Politico has the latest on the status of the fiscal year 2013 continuing resolution currently being debated in the Senate.

According to The Washington Examiner, taxes in the 2010 health care reform bill will cost 6 million Americans $7 billion.

The Associated Press says Census figures show the U.S. economy may have “bottomed out.”

According to Bloomberg, Federal Reserve officials are increasingly worried about inflation.

Why mortgage-backed securities, specifically? The housing market has been one area of the economy that has been picking up lately. By purchasing more of these financial assets the FOMC hopes to make homes more attractive investments, and encourage home prices to rise when there is more demand for homes.

The Fed’s open-ended policy is intended to provide more confidence in U.S. economy. In the FOMC statement, it was made explicit that MBS purchases would continue,“until such improvement [in the labor market] is achieved in a context of price stability.” Essentially, the Fed is going to keep buying financial assets on a monthly basis until there is a significant drop in unemployment, assuming that it remains a viable economic tool. The statement also said that the FOMC will continue to hold the target for the federal funds rate—the overnight interest rate for banks to lend to each other—near zero “at least through mid-2015.”

The Hill says senators are in negotiations to delay the spending cuts set to start in January for at least six months.

Moody’s warned it may downgrade the U.S.’s credit rating, following Standard & Poor’s downgrade in 2011, if lawmakers don’t act to reduce the national debt. The New York Times and The Wall Street Journal have the story.

The Hill reports Senate Majority Leader Harry Reid (D-NV) is still hoping for a deficit reduction deal this year. In a separate story, The Hill says House Speaker John Boehner (R-OH) is not as optimistic. And Politico says, on crisis after fiscal crisis, Washington lawmakers have reacted with “a shrug.”

The Wall Street Journal explains the situation simply: Congress will likely avoid a government shutdown this year, but probably won’t be able to decide on a plan to deal with the fiscal cliff.

The New York Times looks at the likelihood the Federal Reserve will act to add monetary stimulus to the economy before the election.

According to USA Today, Americans are cutting back on their use of credit card debt.

Reuters reports German officials think the U.S. debt is too high.

The Washington Post looks at the future of approximately 5.5 million unemployed youth across Europe and their future.

In Europe, the European Central Bank faces a moment of truth according to Reuters as the central banking authority determines its course of action for it’s bond-buying program.

The New York Times examines a bond-buying plan in Stockton, C.A. that could have contributed to the city’s bankruptcy this summer.

Federal Reserve Chairman Ben Bernanke leaves markets to speculate about the future of quantitative easing to combat a 8.3% unemployment rate, but says action is possible according to Bloomberg.

In layman’s terms? If the economy doesn’t improve soon, they’ll do something about it. If it does improve, then the previous rounds of LSAPs worked.

The problem is that the uncertainty over policy action doesn’t just rest on the choices made by Bernanke, a fact that he addressed in his speech. The Federal Open Market Committee (FOMC) ultimately needs to make a decision, and members are divided on whether or not another round of LSAPs—which would be the third round of quantitative easing since the Fed addressed the financial crisis—is the best way to help ease financial markets. According to Bernanke, there are costs and benefits to a third round of quantitative easing (QE3):

Costs: QE3 has the potential to impair how security markets function by making the U.S. Treasury become a bigger buyer in the market. This could change could increase the risk of financial instability. Moreover, if the Fed becomes a larger player in the market, the public confidence of how easy it is for the Fed to reverse its policies could drop, which could change overall inflation expectations. However, Bernanke thinks that many of these concerns are unlikely to have a significant effect on the economy, based on the lack of evidence of such issues resulting from QE1 and QE2.

Benefits: The U.S. economy could improve. End of list.

Giving the economy a boost would be no small feat for an institution that is tasked with keeping maximum employment in a country facing another month of unemployment over 8 percent. The FOMC meets again from Sept. 12-13 and is likely to revisit the possibility of another round of LSAPs.

After the recent string of disappointing jobs reports coming from the Department of Labor, it has been speculated that the Fed would act, likely with more quantitative easing. But up until now, the only sign of more action came in the form of an extension of “Operation Twist,” which encouraged short-term growth. The programs available to the Fed vary, but Bernanke has repeatedly pointed to fiscal, not monetary, policy as the way to support a struggling economy.

“The most effective way that the Congress could help to support the economy right now would be to work to address the nation’s fiscal challenges in a way that takes into account both the need for long-run sustainability and the fragility of the recovery,” he said in his testimony. “Doing so earlier rather than later would help reduce uncertainty and boost household and business confidence.”

While we continue to wait for a decision from Bernanke on the future role of the Fed in the economy, we’re also wondering if more action from the Fed will have any effect.  After two rounds of quantitative easing and an extension of “Operation Twist,” the Federal Open Market Committee (FOMC) still remains divided over whether or not further action will be beneficial to the economy.

Meanwhile, fiscal policy, the issue that needs to be addressed most urgently by Congress, remains untouched while Congress continues the last week of its August recess. Hopefully when they return, the priorities will shift from the election to actual policy in the face of the fiscal cliff.

Those mentioned in the article pointed to the looming fiscal cliff, growing uncertainty of spending cuts and an inability of politicians to compromise on even the most basic of issues. Paul Diaz, Chief Executive of Kindred Healthcare Inc., says, “If you can’t plan, you don’t spend. And if you don’t spend, you don’t hire.” Mr. Diaz’s comments in fact make the case that Federal Reserve Chairman Ben Bernanke has been making since talk of the fiscal cliff began: “The most effective way that the Congress could help to support the economy right now would be to work to address the nation’s fiscal challenges in a way that takes into account both the need for long-run sustainability and the fragility of the recovery,” said Chairman Bernanke at a July Senate Hearing.

Unfortunately, even upon the return from the August recess, not much is expected from Congress until after the elections. The question is if it will be too late by then?

A third round of quantitative easing, however, is nothing new, and many question its effectiveness this go around. One such opponent, President of the Federal Reserve Bank of Dallas Richard Fisher, says the real problem is Congress’s lack of action on fiscal policy. “[T]here is a throttling mechanism which is called fiscal policy,” Fisher said, and if Congress would act, “we could unleash enormous growth in this country.” Even the Chairman of the Federal Reserve Ben Bernanke agrees, “[M]onetary policy can’t do much about long-term growth.” The only “new measure” for the economy would be Congress acting on fiscal policy.

But, Congress is not in a hurry to act. Having adjourned in the House for their August recess and holding only procedural sessions known as “Pro Forma session” in the Senate, both chambers leave a laundry list of fiscal matters on the table until their return. Some of which include an extension to the 2001 and 2003 tax cuts, the impending spending cuts known as sequestration, nearly 100 other expiring tax provisions and a six-month continuing resolution to fund the government. While the legislative branch is not known for its speedy action on pressing issues, any action at all would be welcome at this point.