NC Budget and Tax Center

Fed takes more aggressive posture on economic recovery

In a mostly positive step towards encouraging the nation’s struggling economic recovery, the U.S. Federal Reserve announced a third round of “quantitative easing,” a policy known as QE3designed to expand the availability of credit for business investment and job creation.

Specifically, the Fed announced two key moves geared towards spurring new lending: 1) its intent to purchase an additional $40 billion per month in toxic mortgage assets currently weighing down the books of major institutional banks; and 2) an ongoing commitment to keeping the prime interest rate (the interest charged for over-night inter-institutional lending) at its current, historically low level between 0% and 0.25% indefinitely, and at least through 2015.

The big news—and the big departure from previous rounds of Quantitative Easing—is that the Fed is promising to continue QE3 as long as economically necessaryie, until the recovery fully takes hold in the labor market—instead of simply scheduling it to end by a specific calendar date.  In other words, the Fed is willing to keep interest rates low, move toxic assets off the books of banks, all in an effort to reduce barriers to private lending—the grease needed to stimulate business investment, job creation, and ultimately sustainable and robust economic growth. And it has promised to do so for as long as necessary.

Now, it’s worth expressing a note of caution about this—it assumes that banks will respond to these new policies by increasing lending to credit-starved businesses, and in turn that these businesses will take this new credit and invest it in job creation.  So while this new commitment is encouraging, it’s effectiveness still remains to be seen.

 

6 Comments

  1. Alex

    September 15, 2012 at 10:59 am

    According to CNBC, last month, the Bank of England issued a report that must have made Fed chairman Ben Bernanke squirm.
    U.S. Federal Reserve Chairman Ben BernankeIt said that the Bank of England’s policies of quantitative easing — similar to the Fed’s — had benefited mainly the wealthy.
    Specifically, it said that its QE program had boosted the value of stocks and bonds by 26 percent, or about $970 billion. It said that about 40 percent of those gains went to the richest 5 percent of British households.
    Many said the BOE’s easing added to social anger and unrest. Dhaval Joshi, of BCA Research wrote that “QE cash ends up overwhelmingly in profits, thereby exacerbating already extreme income inequality and the consequent social tensions that arise from it.” This CNBC article confirms what many econonmists are now saying– this is the worst thing we could possibly do. We’ve already tried 2.5 trillion already..and it did nothing but raise commodity pricing, and lower even more fixed income yields. This radical monetary policy will get us nowhere.

  2. Adam Searing

    September 15, 2012 at 5:23 pm

    “Alex”, “Doug”, “Juan Gonza”, “frances”, “David Wordslay”, and “Andrew” are all made-up names from the same person. It isn’t worth responding to his comments. So, when you see “Alex” get agreement from “Doug” it shouldn’t be surprising. And when you see “Juan Gonza” parrot the line that “Doug” took it should be expected. I guess it’s flattering that the NC right-wing machine feels funding someone to spend enormous amounts of time on our blog is worthwhile, but ignoring the anonymous posts he wouldn’t dare confess to writing under his own name should be easy.

  3. Alex

    September 16, 2012 at 8:25 am

    Adam must have a very boring life if he enjoys posting this same stupid little response every time, or maybe he’s automated it by now. Too bad he doesn’t have anything productive to do.

  4. Frank Burns

    September 16, 2012 at 5:40 pm

    One could make the argument that the Fed is taking action due to the failure of Obama policies to help the economy. It’s an acknowledgement of failure.

  5. Allan Freyer

    September 16, 2012 at 7:36 pm

    Frank, or it’s an admission of failure that the Fed didn’t deploy its full range of powers as aggressively as needed from the beginning given the depth of the Great Recession. Monetary policy (the Fed’s purview) and fiscal policy (the purview of Congress and the WH) are supposed to be used in tandem, each accomplishing its own part in promoting a healthy economic recovery. This is the first time the Fed has decided to juice monetary policy at level commensurate with the depth of the challenge. If Bernanke had done this in the first quarter of 2009, and if Congress had passed the Jobs Act last year, we might well be complaining about a 6% unemployment rate instead if our current 9+%.

  6. Frank Burns

    September 16, 2012 at 10:57 pm

    Allan, I fail to see how printing more money is a long term solution.