Date posted: September 18, 2012
The Federal Reserve has enacted a couple of QE, or quantitative easing, programs in recent years. And they may be ready to embark on another. N.C. State University economist Mike Walden explains what quantitative easing is and outlines the benefits.
“Well, quantitative easing, … or QE, is just the fancy term for meaning the Federal Reserve is printing money, creating money out of thin air and then spending that money to buy financial assets — to buy things like mortgages and government debt.
“And the benefits that flow from this are really in two categories: One, the government hopes that by doing this they will cause the interest rates on those assets to fall, thereby making it easier for the lenders to find people to borrow those kinds of money. So, for example, if the Federal Reserve is buying mortgages, and mortgage interest rates fall, the hope is that more people will go out and borrow mortgage money and buy homes and support the housing market.
“Likewise, if the government is having to borrow money, which they are to finance the national debt, if interest rates are lower that’ll make those costs somewhat less. And analysts who have looked at the impact of the quantitative easing programs of the Federal Reserve say they’ve been successful in that regard. They have caused interest rates to fall by a little less than one percentage point.
“And then the second benefit that the Federal Reserve hopes will flow from these programs is in terms of getting, as I said, people to invest in those markets. So, for example, if the government is lowering interest rates, mortgage interest rates, more people are buying homes, hopefully that will support the price of homes, perhaps send the price of homes up. And that’s certainly been an issue.
“And then also, and this is somewhat odd perhaps to some, by supporting government debt and lowering the interest rate on government debt, it’ll cause investors to look other places to invest their money. And that will support the stock market. And, indeed, again research has found that both of those effects seem to be in play. The housing market has benefited from the quantitative easing as has the stock market.”
Category: Economic Perspective