Date posted: August 23, 2012
Many people speculate that the Federal Reserve will soon embark on another round of QE, or quantitative easing. What would this mean? N.C. State University economist Mike Walden explains.
“Well, what it simply means … is the Federal Reserve will print more money. They have the power to do that. They can create money out of thin air. They will use that money to buy assets, things like mortgages, and other financial investments. And they would be doing this … in order to support particularly those investment sectors of our economy.
“Now, the Federal Reserve has done this in the past. In fact they’ve done this on two occasions in early 2009 and then in 2010. And again given the current weakness in our economy and the fact that economic growth has still not gotten up to levels that economists and others would like, there’s widespread speculation the Fed will do this again.
“Now this is not a permanent fix. It does have risks. The biggest risk is that the markets will look at all this money printing and worry about inflation. Too much money chasing too few goods, the old adage, leads to higher inflation. Also, there’s a concern that it may result in some investment bubbles. Some markets, the values of those markets may be bit up so much because of all this additional money. That could set off a potential plunge in those markets later.
“So the Federal Reserve has to move cautiously, weigh these costs and benefits, but the thinking right now is the Federal Reserve will do this again. We will have more quantitative easing.”
Category: Economic Perspective