Fed hints at more quantitative easing despite its failure so far

quantitative easing

Ben Bernanke's Fed has pumped nearly $2 trillion into the economy since 2008, to little effect. Image: CC Gage Skidmore/Flickr

Federal Reserve chairman Ben Bernanke has hinted that the Fed will begin another round of quantitative easing, known as QE2, to stimulate the economy. The mere possibility that the Fed will buy more Treasuries to pump money into the economy has devalued the dollar, lowered treasury yields, boosted stocks and raised the price of oil, gold, silver, corn and other commodities. Yet unemployment remains persistently high, which is the primary threat to economic recovery, according to Bernanke.

Bernanke says QE2 will prevent deflation

Having lowered interest rates to nearly zero, quantitative easing is the only arrow left in the Fed’s quiver to battle high unemployment. In a speech in Boston Friday, Bernanke said high unemployment is a scourge that could start feeding on itself by causing a debilitating cycle of deflation. CNNMoney.com reports that rather than focus on the Fed’s traditional mission to limit inflation, Bernanke said it was time to seriously consider that inflation is too low. In theory, quantitative easing — pumping more money into the economy — triggers inflation by weakening the dollar. The Fed has increased the money supply by purchasing nearly $2 trillion in assets since 2008, to little effect.

How QE2 has affected the economy

Investors expect the Fed to announce QE2 at its Nov. 2-3 meeting. The Associated Press reports that since Bernanke started hinting at such a move, anticipation of QE2 has profoundly affected the economy. The price of oil is up 10 percent. Americans are paying $400 million more per week for gas. Gold has risen 11 percent. Corn futures are up more than 30 percent. The average interest rate on a 30-year fixed mortgage has fallen to 4.19 percent, the lowest since the 1950s. The unemployment rate remained stuck near double digits.

Why QE2 isn’t likely to succeed

In Boston Bernanke justified QE2. In theory, the combination of a weaker dollar and low interest rates would increase spending, boost corporate revenue, create jobs and drive down unemployment. Kevin Giddis of Morgan Keegan, told CNNMoney.com that more quantitative easing won’t work because it hasn’t yet. “I don’t think buying securities is going to pull the economy out of a ditch,” he said. “The market is not buying it. We’ve made money available freely for a while now. The Fed has to start thinking way outside the box. This is not a war where conventional weapons can be used.”

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