Quantitative Easing Essay

Quantitative Easing

The Federal Reserve has two main goals. The first is to promote the maximum sustainable output & employment and the second, to promote stable prices. Various monetary policies have been, and are being implemented by the Federal Reserve based on the current state of the economy as well as reliable analysis of future developments. The Federal Reserve policy that has been getting the most coverage is that of “Quantitative Easing”.

Quantitative Easing is a policy wherein the Government increases the money supply by buying Government securities, or other securities, from the market. This increases the supply of money by injecting capital into financial institutions, which in turn promotes increased lending and liquidity. This policy is usually used by Central Banks when interest rates have been lowered to almost 0% levels, yet have still failed to produce the desired results. Often times, even with interest rates that low, the economy can still suffer. This is true because even with the interest rates at 0% for what the Fed’s can control, that doesn’t mean it’s 0% for the people taking out loans. Even thought the banks get the money for cheap, they still have to lend it out at a premium for a number of reasons. The first reason being that the banks are a business, and in turn need to make a profit to be able to pay those who they employ. The second reason being that the interest rates could change at any time and the banks know that. That means the interest rates for longer-term loans need to reflect the possible changes in the short term. The last reason is that no matter how great someone’s credit is, the bank still needs to factor in the possibility of that person defaulting on their loan, and the rates need to be able to reflect and absorb that cost.

Quantitative Easing is designed to put more money into more people’s hands at a cheaper cost. All the purchases made by the Fed’s have helped to lower the interest rates on things like homes. The relationship between consumer and producer is also directly affected in this process. When the consumer has more money, he/ she will no doubt spend that money on more goods which generate more production, which generate more jobs, which

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