Last September the Federal Reserve made a commitment to encourage economic growth and reduce unemployment by implementing indefinite quantitative easing. Since then, the economy shrank for the first time in three-and-a-half years, unemployment has increased and the dollar in your pocket isn’t worth what it was yesterday.
The Federal Reserve is the central bank of the United States, but, despite its name, it is a private bank whose monetary policy decisions don’t have to be approved by the President, Congress or anybody else in government.
The chairman of the Fed is appointed by the president and is approved by the Senate, but that is where influence from the government ceases with the exception of occasional hearings; a system designed to free the Fed’s monetary policy from politics.
Charged by the 1913 Federal Reserve Act with maintaining price stability and reaching full employment, the Fed tries to accomplish its mission through the implementation of a number of policy tools, including open market operations and manipulating the federal funds rate and the discount rate.
The federal funds rate is the rate at which member banks can borrow money from each other to replenish their reserves; the discount rate is the rate at which the Fed charges banks for loans made directly to them — which is usually pretty close to the federal funds rate. Both rates have significant impacts on the economy, as they feed through to other rates.
Lower rates are good for the economy, it makes it less expensive for banks to borrow from each other and from the fed, incentivising banks to borrow and then lend at lower rates, helping businesses expand.
As the American economy still licks its wounds from the most recent recession, the Fed would like to reduce rates, unfortunately rates are already below one percent and can’t go much lower than that.
What do you do to stimulate the economy when rates are already near zero? Say hello to Quantitative Easing (QE) 1 and 2 , where the Fed bought more than $2 trillion in Treasury bonds to lower long-term rates and boost the economy — with little effect — which in turn inspired the newest round of Fed buying, QE3.
QE3 — and now QE3b or QE4 — along with keeping rates near zero, is an open-ended mortgage-backed security purchasing program to the tune of $85 billion a month, which Fed Chairman Ben Bernanke has vowed would continue indefinitely until employment improved.
They spent a couple trillion for QE1 and QE2 and now they’re purchasing $85 billion a month of bad mortgage debt for forever? Where does the Fed come up with that kind of money?
They just print it out. Or, technically speaking, they ask the U.S. Treasury to print out more money and purchase it for cents on the dollar.
The Fed has sole authority over the printing of America’s currency. This is how the majority of the Fed’s revenue is created, through seniorage — the amount of additional wealth created by printing more currency.
With this newly printed cash they then conduct their open market operations, lowering rates and boosting the economy.
The only downside is that inflation occurs with every increase in the money supply, increasing the cost of living for everybody while reducing the purchasing power of your dollars.
The Fed’s activities are great for business, corporate profits are the largest in history while workers’ wages are at their all-time lowest share of GDP, CNN reports. As more cash is created without any added value to the economy, there’s more money available but it’s all worth less; the rich will get richer and the poor will get poorer, never the wiser.
As the economy remains stagnant, some are beginning to urge the Fed to do even more, though with the unprecedented buying by the Fed it’s astounding that inflation isn’t a massive problem today — but it won’t always stay that way.
Each dollar the Fed prints is worth less than the last. Bernanke says keep the money coming, though, and there’s nothing you as a citizen can do to stop him. All the while the economy barely improves, savers are hurt by low rates and the purchasing power of the dollar in your pocket diminishes every day.
So sincerely, Fed, from all of us — thanks a billion! (It used to be a million, but … you know, inflation.)