Federal Reserve Taking Action To Stimulate the Economy

The Federal Reserve’s announcement for a new round of quantitative easing measures is aimed at stimulating the economy, with the central bank now buying $600 billion of U.S. government debt over the next eight months. Karen Dynan says the Fed’s action, while unprecedented, is warranted—although it won’t provide the magic bullet to cure all of the nation’s economic ills.

Strong Case for Fed Actions
“The economy is very weak. Conditions in financial markets have certainly improved since the financial crisis. Though credit supply is still uneven, there are still some people in companies that can’t readily get credit. But, moreover, employment has been very, very weak. The recession ended about a year ago and employment has grown only slowly such that we have only made up a small fraction of the 8 million jobs that we lost to the recession. At the pace that things are going, it could be years- it could even be a decade- before we are back to full employment. Moreover, inflation has been falling. It has fallen below the Fed’s implicit target for inflation. So putting all these things together, today’s action seems like there is a strong case for the additional quantitative easing.”

Benefits Outweigh Risks
“So with the new round of quantitative easing, the Fed leaders hope that they will spur faster economic growth. The recovery has been proceeding at a very slow pace, and the idea behind the program that was announced today was that they will bring down long-term interest rates, and they will ease financial conditions, and that that will encourage households and business to spend, and, in turn, lead businesses to expect faster growth and to hire more people.

In terms of the risks associated with the program that they are implementing, the big uncertainty is about just how this program is going to effect the economy, because we have so little experience with this tool. The fear there is that the Fed could have injected too much stimulus into the economy, which would cause overheating and inflationary pressures. That fear doesn’t seem like a very likely outcome, simply because we are so far below the economy’s potential.”

Federal Reserve Move No Magic Bullet
“I think the Fed’s move today was an important part of trying to hasten the economic recovery. The fact is that the recovery has proceeded very slowly, and it could be years until we’re back to full employment. I think what the Fed did today should help bolster the recovery. It is not a magic solution and it is not going to cure all of our problems- it’s probably not even going to cure most of our problems- but I think there is a strong case supporting what they did.”

Fed Action Set Market Expectations
“Fed leaders have been saying for several weeks now that they thought that another round of monetary stimulus was warranted given how weak the economy is, and also [given] the fact that inflation has fallen below where the Fed’s implicit target for inflation is. So, as a result, markets came to expect the Fed was going to decide to do more monetary stimulus at the November meeting, and that it would likely take the form of more quantitative easing, which is a program that tries to bring down long-term interest rates by buying long-term bonds. So, the announcement we saw today was not exactly in line with what some people were talking about, but it seemed broadly consistent with those expectations.”