What can the Fed do now?

Date posted: September 26, 2011

All eyes were on Federal Reserve Chairman Ben Bernanke recently when he talked about the economy. He recognized the challenges in the economy today, but he really didn’t indicate anything specific the Fed would do to increase jobs and incomes. N.C. State University economist Mike Walden outlines Bernanke’s options.

“One, and I think many people don’t know this, the Federal Reserve has created a lot of money. Technically, we call that reserve and push that into the banking system with the idea banks would then loan that out to people and businesses and that would jumpstart the economy. However, what banks have chosen to do is take large amounts of that money and just send it back to the Fed, where they earn interest on it.

“And so one option is to reduce or eliminate that interest rate that the Fed pays on banks reserves. So, that’s an idea that’s floating around there.

“Another idea is to try to focus on reducing long-term interest rates. That would affect things like mortgage rates, bring them down even further to motivate people, for example, to buy homes. And the Fed can do this by going into the market and buying long-term treasury securities. Some, some thought that, indeed, the Fed will do that. But I think the big question out there is whether we’re going to have what’s called Q.E. Three — Q.E. for quantitative easing; translated to the street language, that just means printing more money. The Fed has had two phases of that. Right now they’ve paused. Question is, Will they continue to, continue that again, but will that downside, could that increase fears of higher inflation and really wipeout any advantages that we get?”

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