Tuesday, August 10, 2010

The Fed's Stimulus

Yesterday's hot rumor was that the Fed, which is scheduled to conclude a policy-setting meeting this afternoon, would decide that recent disappointing economic reports warranted some additional fiscal stimulus on its part. With interest rates still at near-zero levels, the question is, what else can the Fed do?

What some investors expect is that the Fed will buy Treasury notes or other securities, in a strategy known as quantitative easing. The purpose is to expand the money supply and, by increasing the number of investors in Treasury debt, lowering the cost of borrowing for the Treasury department. It also provides more money for banks, who then can extend more credit and eventually fund more business activity.

The downside to this strategy - which is sometimes called "printing money" - is that it can lead to inflation. If the Fed does decide to employ quantitative easing, that would be a signal that it has decided that rampant inflation is not such a threat to this economy anymore, or at least not as big a threat to our prosperity as this incredibly slow recovery.

No comments:

Post a Comment