The Federal Reserve reported today that it will "roll over" principal payments on its mortgage holdings into long-term Treasury securities. Bloomberg reports:
Federal Reserve officials will maintain their holdings of securities to prevent money from being drained out of the financial system in their first attempt to bolster the economy in more than a year.
The central bank said it will reinvest principal payments on its mortgage holdings into long-term Treasury securities. The Fed retained a commitment to keep its benchmark interest rate close to zero for an “extended period.”
Net-net the Fed is worried about deflation, but I think this announcement is still quite conservative. The Fed's balance sheet, while bloated, will remain at the same level. So this would not be net-inflationary. They are just not pulling money out of the system.
Meanwhile, consumer credit should continue to decline - which is deflationary. As the unwinding of consumer credit continues, the Fed will likely need to decide whether it's going to really "Quantitatively Ease" further. And probably sooner rather than later.
My guess is that the Fed is too far behind the curve already, and that it's powerless to fight deflation.
Disclosure: Short the S&P 500