Q: How does the Federal Reserve end its stimulus program? Does it just sell the bonds it owns back into the market? –Mike Gayle, via e-mail

A: The Fed actually has a couple of options for ending its stimulus efforts. Selling its bond holdings outright is one of them, but it’s unlikely to pursue that course this time around.

A contraction of the money supply, which is achieved by raising interest rates and selling bonds into the market, is by definition a deflationary measure. As fewer dollars chase the same amount of goods, prices tend to fall. But given the anemic economic growth the US has experienced over the past two years, the last thing the Fed wants to do is spark a deflationary downturn.

While the minutes from the most recent Federal Open Market Committee (FOMC) meeting show the Fed sees growing inflationary pressure, the minutes also show the Fed doesn’t have any sense of urgency about addressing inflation. Rather, the Fed believes any near-term inflation will merely be the result of a transitory spike in energy prices. In fact, the FOMC seemed more concerned about potential downside risks to economic growth, such as slower growth in foreign economies, spending cuts by the government or further household deleveraging.

So instead of taking the more aggressive step of selling its bonds into the market, the Fed is more likely to allow its current holdings to diminish as they reach maturity. That would drain away the additional liquidity the Fed’s pumped into the system over the past five years, essentially weaning the economy off of the Fed’s easy-money policies and allowing organic economic growth to pick up the slack.

The possibility that the Fed will use this approach increases when one also takes Fed Chairman Ben Bernanke’s academic work into consideration. In his academic writings, Bernanke has laid much of the blame for the depth and duration of the Great Depression at the feet of the Federal Reserve because of its decision to suddenly contract the money supply after the first leg of the Depression. While Bernanke can’t dictate monetary policy—the entire FOMC participates in the decision-making process—he’s not going to be eager to repeat what he believes were the Fed’s past mistakes. And as Fed chairman, Bernanke is extremely influential in the central bank’s policy-making.

Q: Last year, BSWS stopped following Abbott Laboratories (NYSE: ABT), but I held on to my shares. Since then, it has decided to split into two separate companies and I’m not sure if I should continue holding my shares or sell. What do you think? –Henry Jackson, St. Paul, Minnesota

A: In October 2011, Abbott announced it will split into two companies by the end of 2012; one will focus on medical devices and diagnostics and retain the Abbott name, while the other will be called AbbVie and focus on pharmaceuticals.

We believe splitting the two businesses is a solid decision.

Over the past five years, the company’s pharmaceutical segment has accounted for half of the company’s sales and has averaged revenue growth of around 50 percent per year, while the diagnostics and devices side of the business has produced revenue growth in the low teens.

Although pharmaceuticals have generated substantial revenue for Abbott, they also carry operational risk. For example, Abbott’s blockbuster cholesterol-fighting drug TriCor, which has more than $1 billion in annual sales, will likely lose its patent protection in July after more than 35 years of exclusivity. It will be tough to replace that lost revenue, particularly since TriCor’s successor drug TriLipix recently had some unfortunate clinical trial results that showed it might not be as effective as previously believed.

Still, the company has a number of promising drug candidates in various stages of clinical trials, which could eventually make up for any revenue lost from TriCor. But the new AbbVie will certainly have a higher risk/reward profile than the diagnostics and devices company, which is more of a slow but steady growth business.

Regardless of the future challenges, we view the split as a positive development that will allow management to focus on specific areas of expertise and grow their respective businesses, which should ultimately unlock additional value for shareholders.