Does Quantitative Easing Work in Boosting the Real Economy?

Tomorrow the Federal Reserve will make an important and much anticipated announcement about monetary policy over the coming months. The main question for most market watchers and economists has to do with quantitative easing, or QE. It is widely believed that the Federal Reserve will initiate a program of quantitative easing in which a central bank buys financial assets with money it creates. This adds to the overall quantity of reserves in the banking system – hence the name quantitative easing.

The goal of the QE program will be twofold. First, the Federal Reserve is charged with ensuring full employment in the US under its legislated dual mandate. As unemployment and underemployment is high in the United States, the Fed hopes it can use quantitative easing as a tool to bring the US closer to full employment. Second, the Federal Reserve is also charged with ensuring price stability in the US. As both the official and the core rates of consumer price inflation (CPI) as measured by the US government have fallen to near zero, the Federal Reserve is concerned that it will lose control over its ability to ensure price stability. The Fed hopes it can use quantitative easing as a tool to bring the US closer to its stated long-term inflation target, which is a CPI increase of about 2%.

I have talked about quantitative easing often in the past. But as we head into the Fed’s decision, I want to ask you readers the following:

  • "Does Quantitative Easing Work in Boosting the Real Economy?"

The poll question and potential answers are embedded below. Please answer the question on our site and respond in the comments of this post with a brief explanation as to why you answered as you did. Thank you for your input.

  1. Dh 56corvette says

    The Fed is working on the supply side and not the demand side of the equation. Just printing more money does nothing for demand. It just makes commodities more expensive like oil, tied to the dollar so if it goes up what in the US does not require oil or energy to produce. Food goes up, clothes, building materials and anything else in limited supply. Copper,and other natural resorces increase in price. Consumer’s already strapped and spending sluggish, this is supposed to make them spend more? How, when things will cost more. Come on China lets have a monetary value war!!!!!

  2. rjs0 says

    its more my sense of what might happen than an exact scenario; my feeling is that QE will drive a commodities/market bubble and not affect unemployment… let me try to explain…at least as its been described so far, the fed will be buying long term treasuries; in turn, those such as PIMCO who are now in treasuries will move to other markets, possibly into corporate debt or emerging markets…the liquidity eventually works its way into equities and commodities, and to that extent that commodities play into prices you might see some minor increases at the street level….as you mention, it will continue to allow the banks to recapitalize, but its still pushing on a string; just like the first QE, there will still be no incentive for the public or business to borrow when the public is overextended already & businesses are still below capacity…so without accompanying fiscal policy there will be no increase in spending, and no boost to the overall economy…

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