The open-ended bond buying that the Federal Reserve announced Thursday prolongs its role as the anemic economy's main crutch in a bet that higher home and stock prices will get consumers to spend more.
But prices for fuel and food are heading up too, and additional quantitative easing could stoke inflation further. The producer price index leapt 1.7% in August vs. July, new data showed Thursday. That was the biggest monthly gain in more than three years.
Under the new plan, the Fed plans to buy $40 billion in mortgage-backed securities a month, though it may adjust purchases to suit economic conditions. With the central bank already buying $45 billion in long-term bonds each month via Operation Twist through 2012, that means $85 billion in bonds bought monthly.
U.S. stocks shot up on the news. The dollar fell against the euro, and oil and gold prices jumped.
The Fed also said Thursday it sees benchmark interest rates staying near zero through mid-2015 vs. its prior forecast of late 2014. It now sees GDP growth of 1.7% to 2% in 2012, down from 1.9% to 2.4%.
Fed Chairman Ben Bernanke signaled easy-money policies will continue until a substantial recovery is certain. "We're not going to rush to begin to tighten policy," he said at a news conference, adding later that "little wiggles in the numbers" won't be enough to ratchet back stimulus.
This third round of quantitative easing, or QE, comes amid skepticism that the $2.3 trillion in prior rounds did much to help the real economy, as opposed to just boosting stock and commodity prices. But Bernanke pointed to the wealth effect consumers can feel from higher asset prices in asserting QE can create the added demand the economy needs.
"This is a Main Street policy because what we're about here are jobs," he said.
Fed policymakers continue to see subdued inflation. Their forecasts put it at or below the 2% target through 2015, even as they raised projections for economic growth in 2013 and 2014.
Bernanke repeated his caveat that monetary policy is not a panacea and warned that the Fed can't offset the toll of any steep, year-end tax hikes and spending cuts.
Some analysts are unconvinced the Fed can help much, but they acknowledge it must do something as the economy loses steam.
"This is not going to jump-start economic growth," said Greg McBride, senior financial analyst at Bankrate.com. "It's not going to bring down unemployment.
Instead, he sees higher stock prices and worse inflation. Mortgage rates might fall even lower, but they may not create a healthier housing market, he said.
Open-ended bond buying, which injects newly created money into the economy, is also a sign the Fed is willing to tolerate higher inflation, he added.
This bond-buying program will just about exhaust the Fed's options and have marginal benefits, said Dan Seiver, chief economist at Reilly Financial Advisors.
For him, inflation risks are less of a concern than whether monetary policy is capable of accelerating economic growth now.