Chairman Ben Bernanke of the Federal Reserve (the Fed) recently announced the U.S. central bank’s plan to purchase $600 billion worth of U.S. bonds—to a largely critical reception. This approach, which economists call “quantitative easing” (QE), is intended as a stimulus to aid the struggling U.S. economy. Worried about continued high U.S. unemployment, Bernanke hopes the bond-buying program will spur economic activity. Such purchases (which only the central bank can make) aim to lower interest rates, hike stock prices, and boost business and consumer spending—all of which would help create more jobs. This could in turn increase individuals’ and businesses’ confidence in the economy and yield higher incomes, profits, and economic growth. The program is also intended to counter the risk of deflation—a condition of dropping prices, wages, and asset values (such as of stocks or homes).
Several countries criticized the Fed’s plan claiming it would weaken the U.S. dollar and thus give American exports a competitive advantage. Some critics say the Fed’s proposed action amounts essentially to printing money out of thin air and will unleash inflation. Others are more concerned with tackling the nation’s debt problems. Bernanke, meanwhile, has responded by warning China and other emerging nations that, by keeping their currencies undervalued, they are threatening to derail the global economic recovery.
Bernanke is pursuing the controversial monetary policy of quantitative easing in part because any fiscal stimulus plan would be politically unpopular at the moment. The plan has been dubbed QE2 because the Federal Reserve already made about $2 trillion in similar purchases during the recent recession. It is possible that none of the benefits of the Fed’s move will come to pass. After all, interest rates are currently very low. And many companies and consumers are refraining from spending as they concentrate on reducing their debts.
Related Links
- Bernanke Defends Bond-Purchase Plan, Warns China
This article summarizes the Federal Reserve’s plan to purchase about $600 billion in U.S. Treasury bonds and focuses on Fed Chairman Bernanke’s warnings about currency manipulation.
(Source: Associated Press, November 19, 2010) - Quantitative Easing, Explained
This Web page from NPR’s “Planet Money” defines and explains the economic concept of “quantitative easing” – basically, the Federal Reserve’s phrase for “printing money.”
(Source: NPR, October 7, 2010) - Federal Reserve Minutes Show Split on QE2
This story explores the arguments for and against quantitative easing (QE) as a way to jump-start the economy.
(Source: CNNMoney.com, November 23, 2010) - Why the Fed’s Bold Move Won’t Work
This opinion piece argues that the Fed’s quantitative easing measures will not help the U.S. economy to recover, but rather may do just the opposite.
(Source: CNNMoney.com, October 29, 2010)