Actions by the Federal Reserve and other central banks – or their failures to act – are another source of investor anxiety. In surveys, many economists say the Fed is getting its policy balance about right. But some think the Fed has been doing too much. Bond-buying programs with nicknames like "QE2," and an adjustment of that strategy known as "operation twist," make the Fed look panicked, this camp argues.
One risk is that monetary ease is fueling inflation and potential commodity bubbles. But another sizable group of economists says the Fed should be doing considerably more in efforts to rekindle economic growth. The idea is that with the jobless rate so high, there's room for more monetary stimulus before inflation becomes a big problem. Similarly, many argue that the European Central Bank should be less focused on inflation and more geared toward fending off recession risks.
Bottom line: There are differences of opinion even within the Fed itself. Rightly or wrongly, many investors figure central banks are nearing the limits of their ability to coax the economy to grow. Meanwhile the Fed has downgraded its outlook for the economy, and talked about "significant downside risks" in a statement released after its Sept. 21 policy meeting.
Despite all this, there's still the old idea of letting "the market" work things out. The only potential problem is ...
