What's this 'QE2' all about?

The Fed has proposed a second (2nd) round of quantitative easing (QE) in efforts to forestall deflation. Will it work, and if so, at what cost?

By , Guest blogger

  • close
    Federal Reserve chairman Ben Bernanke addresses a Federal Reserve conference in Boston, on Friday, Oct. 15. The Fed is prepared to buy Treasury bonds to rejuvenate the economy, Chairman Bernanke said, but is wrestling with the scale of the program.
    View Caption

Federal Reserve Chairman Ben Bernanke is pushing for another significant round of “quantitative easing” – now dubbed “QE2” by Fed observers – on the grounds that the economy’s response to simulative macro policies since 2008 has been anemic. What the economy needs, this thinking goes, is some inflation. While much of the public sees the run-up of growth in government and exploding deficits as keys concerns, Bernanke, continuing his soft stance on deficits, has argued that fiscal restraint would threaten the recovery. Instead, he argues that monetary policy still has arrows in its quiver that should be used to lower the unemployment rate and rejuvenate the economy while also preempting the dreaded prospect of deflation .

Chairman Bernanke’s October 15 speech on “Monetary Policy Objectives and Tools in a Low-Inflation Environment” at the Boston Fed Conference argues that deflation will seriously handicap implementing countercyclical monetary policy given the zero bound on nominal short term rates. The Fed’s current (and implicit) inflation target of 2% is meant to ensure adequate maneuverability for Fed discretionary monetary policy. (Why we need monetary policy or a central bank at all is a topic for another day.) And according to some insiders, Bernanke and his supporters in and beyond the Fed seek an inflation rate in the 4-6% range for just “a couple of years” (see Allen Mattich.).

The Fed believes that QE2, which would involve massive purchases of Treasuries, would push yields on Treasuries and bonds down and produce a surge in investment and consumption expenditures. Yet, this assumes that the economy’s recovery has been retarded by insufficient aggregate demand – much like a flat tire – but which ignores the well-documented effects and uncertainties of existing and prospective government policies themselves on decisions at the market-level. Within this milieu, if nothing else, the Fed’s inflationist moves will mask and circumvent the very micro adjustments necessary for economic recovery. Given the one trillion dollars of excess reserves currently held in the banking sector, the widening call for outright inflationist policies is an alarming, but probably predictable, development in Washington. As Allen Mattich writes:

Recommended: Business

“In other words, the thinking goes, if the Fed could return the U.S. economy to the activity levels of the 1970s, even if that means 1970s-style inflation and consequent recession, that would be less bad than years of 1930s-style shortfalls in aggregate demand. And this is probably what the Fed is thinking as well.”

Government intervention gave us this recession and government policies have unnecessarily prolonged and intensified the pain. Now, Federal Reserve inflationary policies are apparently poised to sweep us up, up, and away until, that is, the balloon bursts once again.

Add/view comments on this post.

------------------------------

The Christian Science Monitor has assembled a diverse group of the best economy-related bloggers out there. Our guest bloggers are not employed or directed by the Monitor and the views expressed are the bloggers' own, as is responsibility for the content of their blogs. To contact us about a blogger, click here. To add or view a comment on a guest blog, please go to the blogger's own site by clicking on the link above.

Share this story:

We want to hear, did we miss an angle we should have covered? Should we come back to this topic? Or just give us a rating for this story. We want to hear from you.

Loading...

Loading...

Loading...