Neil Irwin generally offers the best insights into what the Federal Reserve staff is thinking, so his account of the potential downsides of monetary action is worth taking seriously:
But should the Fed overshoot in its plan to pump hundreds of billions of dollars into the economy, it could produce the same kind of bubbles in the housing and stock markets that caused the slowdown. Or the efforts could fall short and fail to energize the economy, leaving a clear impression that the mighty Fed is out of bullets – thus adding even more anxiety to an already dire situation.
I think it’s on the second point, about credibility, that outside commenters have the most constructive role to play. Specifically, I for one promise to be super-nice to everyone associated with the Federal Reserve if it tries really really really hard to spark growth and it just turns out that Mark Thoma is right and this doesn’t really work. But conversely it seems to me that the real credibility-killer for the Fed is if it meekly acquiesces in quarter after quarter of below-target growth in the price level while the country stays mired in high unemployment.
On bubbles, I’m not quite sure what to make of this. I suppose it’s true that if we bring unemployment down, that does set us up for the prospect of a new recession leading to high unemployment. But simply reconciling ourselves to high unemployment doesn’t help with that.