Department of Fun Post Titles: Quantitative Easing and the Federal Reserve
My colleague Neil Irwin has a nice piece on the state-of-play at the Federal Reserve:
Having pulled out every tool at its disposal to combat the recession and financial crisis, there is an open question about what kind of appetite Fed leaders might have for further action. On one hand, the economy is now declining at a more measured rate than it was this winter. On the other, the economy remains in decline.
The most obvious way the Fed could escalate its response would be to expand or speed up its planned purchase of $300 billion in long-term Treasury bonds. That step would help reduce long-term interest rates for the U.S. government and, if it works as intended, businesses and consumers. Long-term Treasury rates have risen in recent weeks, reflecting in part the improved economic outlook.
But the Fed purchases, a strategy known as quantitative easing, are controversial inside the central bank and out. Some officials worry that it could make it appear as though the Fed is printing money to support the government's giant budget deficits.
In this case, the Federal Reserve actually would be printing money to finance the government's giant budget deficits. But the point isn't to lower the deficit. It's to lower the interest rates that result from the deficit. The concern is that we're trading short-term growth for longer-term inflation (as the Federal Reserve is printing money to buy debt).
If you want a good explanation of how this works, the Financial Times released a helpful animation of the process. A quantitative easing cartoon, if you will. I'd rate it as worse than Family Guy, but substantially better than American Dad. On the other hand, if you feel like you're a Very Serious Grown-Up Who Doesn't Watch Cartoons Anymore, you can also read this paper arguing that Japan's experience with quantitative easing was, on net, negative.
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