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Quantitative easing – round 3



Image thanks to KJGarbutt

The latest big announcement by the Federal Reserve is to continue with more quantitative easing (QE) until the labour market improves. This open ended statement caused markets to react positively.

So what is QE and why does it seem to be the only game in town?

To be fair, QE is not actually money printing, even though it has a similar effect. While money printing puts the money in the hands of the public, QE allows central banks to finance fiscal deficits with the aim of giving banks more money to lend at the same time as reducing long-term interest rates to bump up business and consumer activity.

With interest rates in these troubled economies are virtually at zero, policy makers have almost no other politically acceptable tools available other than to increase the balance sheet of central banks by buying more assets with central bank money.

The first two rounds of QE have produced little effect to push down unemployment and secure consumer activity and sustainable business lending. Therefore whether another round will ultimately work remains to be seen. We have no option but to give them the benefit of the doubt.

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