The Broader Market

By Jordan Eizenga

The Federal Reserve announced today that it will resume purchases of US Treasury bonds.  This activity is referred to as Quantitative Easing and it is designed to maintain demand for Treasuries, which keeps their prices elevated.  Given that interest rates and Treasury prices move in opposite directions, QE pushes interest rates down.  This, in turn, stimulates the macro economy, particularly in a recession, by allowing businesses and households to borrow more cheaply in order to make purchases. 

QE also increases the money supply by effectively creating money to make the bond purchases.  Given the risk in the current economic environment of deflation, an increase in the money supply at this point in time is an important step in ensuring that price levels do not drop. 

The only downside of the Fed’s activities is its scale – it intends to purchase only $10 billion worth of Treasuries per month, which it is financing with the proceeds of other securities that are set to expire on its balance sheet.  This means that the Fed is not even really expanding its balance sheet (which is just another of way of saying that it is not increasing the amount of assets that it owns). 

Conclusion: the Fed could be doing much more to stimulate the economy through monetary policy.