Reasons the Fed Uses Quantitative Easing
The Federal Reserve uses quantitative easing for a variety of reasons:
Foster maximum employment. The Fed argues that money printed through the QE program can be used to help create new jobs for Americans since businesses should end up with more cash on hand to finance new hirings. However, critics argue that any actual employment benefits are only temporary.
Encourage lending. The general premise behind this claim is that central banks can reduce long-term interest rates by buying treasuries. In providing financial institutions with more cash, these institutions should be more willing to lend out money at lower rates. Such loans then act to further stimulate the economy through higher consumer spending and business development.
Encourage borrowing. Low interest rates tend to encourage increased borrowing. Although this can help stimulate the economy, some argue it also has the tendency to encourage customers and businesses to take on unnecessary debt. At the same time, some level of debt and leverage is essential to the growth of any economy, especially one in dire straits.
Increase spending. The theory is that as more money enters the economy, consumers will have more to spend. This will in turn increase company profits and create more jobs, helping stimulate the stock market. Ultimately, these factors should result in newfound consumer confidence and an economic recovery.
Complement low interest rates. Another tool used to stimulate the economy is the federal funds rate. By setting this rate low, the Fed can effectively encourage lending. But what if this rate is already low, and yet the economy continues to struggle? Consider the case in the late 2000s when the federal funds rate was set between 0% and 0.25%. The central bank could not lower the rate any further. As a result, quantitative easing gave the Fed another monetary tool to stimulate the economy through an increased money supply.
Many of the arguments for quantitative easing make sense theoretically. However, some economists criticize these claims and feel that quantitative easing only provides short-term benefits. Some of these debates are also politically motivated.
There is no doubt that quantitative easing provides some benefit to a struggling economy. Yet, how much benefit it provides to the current state of the US economy remains to be seen.