The Fed’s New Stimulus: A Trillion Dollars Worth

The Federal Reserve announced plans to buy more securities.  (Read their announcement here.)  This makes a lot of sense to me.  Monetary policy always works, albeit with a long time lag.  Some have argued that interest rates cannot go lower than zero, but there are only two interest rates near zero: Fed Funds and short-term Treasury Bills.  Longer maturities, mortgage-backed securities, corporate bonds and municipals all pay higher rates now, so their rates can be pulled lower.  The us hard-core monetarists, the level of interest rates is not as important as the injection of money into the economy, which this program does.  (For an elaboration of these thoughts, see my short video here.)

Doom-and-gloomsters have said that the American economy might have a “lost decade” as Japan’s did.  Japan got interest rates low and figured they couldn’t do anything more.  With deflation, though, their low interest rates were not particularly low in real terms.  Then they began “quantitative easing” and soon recovered.

I’m not sure whether everyone will agree that this step is quantitative easing, but it’s certainly easing, and the economy will certainly recover.

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