The Federal Reserve is going to purchase $600 billion in U.S. Treasury bonds over the next eight months in an effort to help our ailing economy.
What does that mean?
It means the Fed will create money, literally out of thin air, in order to buy Treasury bonds on the open market — about $75 billion worth a month through next June.
The plan calls for the use of an unconventional technique called quantitative easing (QE), in which the central bank pumps money into the financial system with hopes that the cash will eventually funnel into the real economy.
“Quantitative” refers to the amount of money — in this case $600 billion — and “easing” refers to reducing the pressure on banks.
The Fed doesn’t actually print cash but instead credits the accounts of banks and other financial institutions from which it buys Treasury securities. That gives the banks the resources to create new money which could, in turn, stimulate the economy.
If the Fed’s plan works, it should:
Lower long-term interest rates
Make it cheaper to buy a house or refinance a mortgage
Allow businesses to borrow money to invest, hire and expand
Lower the unemployment rate
Increase consumer spending
Strengthen our economy
Naturally, the controversial program was met with opposition, and there are risks involved that could cause the plan to backfire, but we aren’t even going to discuss those unless they happen.
Instead, let’s hope for a comeback to the real estate market, a lower unemployment rate and a healthier U.S. economy.
To read the statement about this program from the Fed, check out www.federalreserve.gov.