10/28/2010

What's the Fed's Next Move to Recovery

It is likely that Fed is going to buy more treasury bonds in order to stimulate the economy further. This move is considered risky since it may cause more future inflation that would be acceptable. The idea is that buying treasury bonds will lead to lower interest rates and further give incentives to banks to loan money to potential borrowers. The borrowers would then be able to refinance their mortgages and increase their disposable income. An increase in disposable income would lead to more purchases and move the country to a quicker recovery. The move would also motivate businesses to expand with lower monetary costs, and thus hire more employees. Although the article cites a relatively low number in jobs created by this move, the Fed seems to be willingly to take the risk, rather than slip back into a deeper recession.

1 comment:

Dave said...

I think the big issue with this is not whether or not it is a good idea, but what the magnitude of its effect is likely to be (is the economy inelastic with respect to this sort of policy).

People complain about this sort of move (wrongly I think), but at its core what they are really worried about is its scale. If the Fed had to do something small to get a big effect (so that the economy was elastic), we wouldn't debate this at all.

But, because it seems like the Fed's actions haven't done much in the recent past (I think this is magical thinking that is not supported in the data) people are not in favor.