NCPA - National Center for Policy Analysis

What Is Fed's QE2, and What Will It Do? Experts Explain in Everyday English.

November 11, 2010

QE2 sounds like a luxury ocean liner.  But many wonder if the Federal Reserve's second round of "quantitative easing" would be more aptly named the Titanic, says the Dallas Morning News.

"The book has not been written whether QE2 is a good idea or a bad idea," said Sam Manning, general partner of the Blagden Fund in Dallas. "There are many highly educated, brilliant minds on both sides of the argument."

But here are some basics about quantitative easing that most agree on:

  • The way it's supposed to work is that the Fed buys securities in the open market, paying with a government "check." The sellers deposit those checks into their banks.
  • The banks redeploy those deposits as loans to consumers and business.
  • The money supply expands and, in turn, so does the economy -- or so the theory goes.
  • The likely -- and intended -- effect is inflation.

The Fed is worried about deflation and the psychological effect of our seeing assets such as 401(k)s, houses and stocks devalue.  It's the "wealth effect" in reverse, says the Dallas Morning News.

But some fear that the cure could be worse than the disease.

Bob McTeer, distinguished fellow with the National Center for Policy Analysis, disagrees:  "Everybody's treating this as a very unusual, draconian thing that's extremely risky, probably won't work and likely to have adverse consequences.  I think they're overdoing it."

If successful, the action will create a manageable inflation rate that could push the stock market and housing prices higher, entice businesses to go ahead with projects and banks to lend to them.

If QE2 is too successful at unleashing money, inflation could shift into hyperdrive.  Then the Fed will have to engage a completely different set of steering mechanisms.

Source: Cheryl Hall, "What Is Fed's QE2, and What Will It Do? Experts Explain in Everyday English," Dallas Morning News, November 10, 2010.


Browse more articles on Economic Issues