The Fed to the rescue – again?

Chairman Ben Bernanke of the Federal Reserve recently announced some major new initiatives by that powerful agency to support the economy. N.C. State University economist Mike Walden elaborates.

“Well this is now called QE3 — quantitative easing 3. The Fed has done this two previous times since the recession began. Essentially what the Fed is doing is they’re using one of their big powers, the power to create money; they can create assets of money to buy things. And they have said that they’re going to go on a regular program each month of buying about $40 billion worth of mortgages. They’ve also said they’ll buy some other things. They weren’t specific there.

“This is designed, I think, to support the housing market. I think the Fed is encouraged by some of the positive signs in the housing market. So, essentially they’re telling lenders, ‘Hey if you lend a mortgage, you don’t want to keep it; we’ll buy it from you.’ So, this is an effort to put an underpinning there in the housing market.

“I think also …, and this is unstated, the Fed wouldn’t be disappointed if this money printing actually generates a little higher inflation. What that does is effectively reduces interest rates, because really an interest rate is based on not only the rates you pay but the expected inflation rate. So if you push inflation higher, that really causes borrowing costs to go down.

“And I think it also may motivate consumers to spend now rather than later if they expect prices to be higher later.

“So this is a big deal. This is a major, I think, policy effort right now among policy makers, Federal Reserve to help the economy. We’ll have to obviously wait and see how it turns out.”