The Federal Reserve is hauling out its most formidable monetary weapon, a policy called “quantitative easing.” With the economy sluggish and core inflation flat, Fed Chairman Ben Bernanke apparently thought there was little choice.
It’s a disturbing step to take.
For a central bank, quantitative easing is a desperation move. The Fed’s first foray into this realm, when it purchased Treasuries and mortgage-backed bonds after the 2008 meltdown, seemed to work. It helped stabilize banks and financial markets.
But the second round, which began this month, may be going too far.
The Fed says that over the next few months up until the end of March it will buy $600 billion in U.S. Treasury securities because “the pace of recovery in output and employment continues to be slow.”
It will make these purchases using money it creates out of thin air. Thus the term “quantitative easing.” With interest rates at near-zero levels, the Fed can’t ease monetary policy by lowering interest rates further. So it attempts to ease policy by direct money-creation — what some call “printing money.”
The Fed doesn’t actually start up a printing press. What happens is that a bank’s account with the Federal Reserve is credited with a sum of created money in exchange for Treasuries. With the bank’s reserves thus boosted, the bank’s capacity to make loans is increased. The result, supporters hope, will be more business activity and more jobs.
But the risks are considerable.
The prospect of all those new dollars already has caused the value of the U.S. currency to fall in international markets, undermining the dollar’s status as the world reserve currency.
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