The Fed’s next move
Date posted: October 7, 2010
With the economy still struggling and the federal government deep in debt, many people are looking to the Federal Reserve as perhaps the only institution that can jumpstart the economy. N.C. State University extension economist Mike Walden explains what the Fed can do:
“The Fed has already done a lot. … They have pushed interest rates down, they have printed a lot of money, they have bought loans in the private sector. Many experts, though, think the Fed has two bullets left in their arsenal.
“One is to go and buy more investments — maybe even buy stocks — to prop up the investment markets and make investors more willing to put their money into those investment markets. Now, of course, how the Fed would pay for this would be simply by printing more money, and then you have inflation worries down the road.
“The second thing the Fed could do is to make it more expensive for banks to borrow from the Fed. Right now a bank can borrow from the Fed at a zero interest rate. And that is done to encourage banks to borrow, the idea being banks borrow money, they’ve got more money in their vault, they will loan out that money. But what banks have been doing is simply turning around and investing a lot of that money into safe treasury securities, so it goes back to the government. So the idea of increasing, perhaps, that interest rate above zero would motivate those banks to make loans to businesses — small business and others — where they are going to get a higher interest rate.
“Which of these two bullets the Fed uses we don’t know, but I think the Fed has signaled they are going to do something.”
Category: Economic Perspective