More easing by the Fed?

Date posted: February 20, 2012

There’s speculation the Federal Reserve may embark on another round of monetary or quantitative easing. These are the terms used in press accounts. N.C. State University economist Mike Walden explains, in plain language, what this means.

“Well, it simply means the Fed is printing money. They’re creating money. Now most of it is done electronically rather than physical units of money. But the Fed’s already done this. Over the recession, they’ve actually created $2.5 trillion since late 2008. They’ve done that in order to try to provide more credit to lenders in order to try to encourage lending and spending. They’ve also done it to try to support particular markets — for example, the housing market — by buying mortgages.

“And the Fed typically does this in spurts. And they’ve already done it in two spurts amounting to that $2.5 trillion. And now there’s speculation, nothing is settled, but now there’s speculation they may be ready to embark on another round of money printing maybe to the tune of $1 trillion. The thought is that they will use this created money, if you will, to support the housing market by going out and buying mortgages in the so-called secondary market.

“Now people worry about this for two reasons: One, they worry that this can spark inflation — that is to say that this eventually will mean that prices across the board will be higher — not only retail prices but commodity prices. Also people worry about that this effectively debases the value of the dollar, particularly in international trade, so it makes our dollar worth less against other currencies. We haven’t seen that yet, but certainly that could be a delayed effect down the road.

“So there will be an intense debate about this if, indeed, the Fed does embark on this new round of money printing.”

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