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The Fed's new easing scheme

Long term interest rates will fall, making monetary conditions "easier"

Jonathan Ernst/Reuters
U.S. Federal Reserve Chairman Ben Bernanke arrives to speak at a conference on systemic risk, at the Federal Reserve in Washington. The Fed announced a new round of financial easing yesterday, Sept. 21, 2011,

Undeterred by the utter failure of QE2 in reinvigorating the U.S. economy, the Fed now announces a new "easing"-scheme. This time they will swap short-term to long-term U.S. Treasury securities. Given the fact that short-term interest rates will likely remain basically unchanged while long-term interest rates will fall, this will make monetary conditions "easier" (I.e. more inflationary).

As the lower long-term yields will increase demand for credit, this will increase money supply, inflation and nominal output. However, because the increase in inflation could be as big or bigger than the increase in nominal output, real output may not increase.

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