The Fed, a.k.a. the Federal Reserve, is more about easing the money supply...rather than ripping the bandaid off. Quantitative easing is when a central bank, like the Fed, increases the money supply by buying government securities back from the market.
Quantitative Easing, or QE, is considered a kind of last resort in the U.S. You’ll likely only find the Fed pulling the QE wrench out of their monetary policy toolkit if interest rates are already at zero (or near zero). Once interest rates are down as far as they can go, there’s nothing else the Fed can do with interest rates to encourage investing and spending. They’ve made borrowing cheaper...and, yep. That’s about it. And they hope that will result in more people borrowing, which should stimulate the overall economy (employment, spending, all of it).
If the economy is still looking pretty recessionary after pushing interest rates down to zero, then the Fed will do QE. In other countries, QE is a tool the central banks use more often than in the U.S. Like in Japan.
We saw the Fed executing quantitative easing during the Great Recession of 2008. The subprime mortgage crisis took down the entire economy with it, leading to super-low interest rates and QE. Pulling out all the stops.
The reason we should “ease” the money rather than lump-sum it is because increasing the money supply decreases the value of each dollar. That means: inflation nation. Hyperinflation is one of the worst scenarios, where prices climb at an alarming rate, and people stop trusting fiat currency.
The other worst scenario: stagflation. That’s when the central bank has pulled out all the stops to get the economy going again, we’ve got inflation, and yet GDP is still going down. It’s all about...easing into it.
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Finance: What is the Federal Open Market...15 Views
finance a la shmoop what is the Federal Open Market Committee... FOMC! come say it
with me FOMC yeah that's the noise of meatball makes when it hits the floor it [Meatball lands on the floor]
also happens to be the acronym for the Federal Open Market Committee and part
of its purpose in life is to manage financial outcomes through monetary
policy all right well the Federal Reserve pulls three levers of monetary [3 Levers appear]
policy discount rates open market operations and bank reserve requirements
those are the big three the big three monetary policies used to try and [Monetary policies appear]
control the economy well the font is responsible for the open market
operations part of that equation it tries to fight the twin evils of [Person pulls open market lever]
unemployment and inflation and among other things if unemployment is high
well in general the FOMC will seek to increase the supply of money by holding
back on sales of government paper like t-bills bonds notes and all that good
stuff leaving more cash sloshing around in the [Dollar bills appear]
marketplace and hopefully encouraging the cost of renting money or interest
rates to decline like encouraging people to borrow because rates are cheap well
when people can borrow more cheaply yes they're incentivized to spend more at [Person picks up stack of cash]
the mall on earrings and rings for other places well it works in the opposite
direction as well with the FOMC fearing inflation while they'll issue
lots of government paper sucking out the excess cash that was previously in the [Money supply meter declines]
marketplace and likely causing interest rates to rise right so cash will be less
available and people want more to rent their precious dollars as interest got
it okay well the key issue remains that the FOMC is making money more expensive
when it does that when an issues paper sucking cash out of the system it's hard
concept for most people including me to understand here
well the FOMC called eight secret very dan Brown like meetings a year to look [Months of year appear on calendar]
through reams of data and decide what policy should be note that they're
applying monetary policy here to do their bidding not fiscal policy the gist
is that the committee is the one sitting atop monetary policy in the US and it's
the committee who makes the decisions on the big three dials they can turn one [Committee standing by 3 dials]
two and three they can sift through data on the economy jobs inflation bang
fear surveys etc and then make decisions about what to do or you know what not to
do I remember that Soup Nazi from Seinfeld no bonds for you [Nazi holding a bond]
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