What QE2 Could Mean for Ordinary Americans
The words “quantitative easing” tend to make the eyes glaze over. But this pending economic maneuver could have a real and significant impact on households nationwide.
The Federal Reserve announced in early November its plan to purchase $600 billion in Treasuries in an attempt to stimulate growth and job creation. This will mark the second time in three years the Fed has turned to quantitative easing, as the measure is known.
This second round, often referred to as QE2, has sparked controversy among economists and political leaders. More quantitative easing will lower long-term interest rates and, at least in theory, bolster business’s access to credit. Borrowing money, whether for business capital expenditures or for a homeowner refinance, should become easier.
At the same time, another round of quantitative easing will weaken the dollar. That will help make American exports cheaper, but it could also send commodity prices soaring.
The first round of quantitative easing (from late 2008 through spring 2010) is cited as one the turning points that helped pull back the economy from the brink. The Fed purchased about $1.7 billion in mortgage debt and Treasuries through this past March.
Impact on American Families
For most consumers, talk of quantitative easing and increased inflation is more likely to spur yawns than careful consideration. And that’s understandable. Part of the problem is that economists and politicians alike have done a poor job of explaining what it all might mean for the average American.
Here’s a look at a few ways households and individual consumers may be affected by another round of quantitative easing, for better and worse:
Lower Interest Rates, at Least for Now
Quantitative easing is designed to keep interest rates low while spurring inflation. Home buyers and homeowners have enjoyed record-low interest rates for months. They’re likely to trend even further downward, making it easier for consumers to refinance their mortgages or to even purchase new homes. The problem is that if inflation spins out of control, the Fed will likely reign it in by raising interest rates.
Decreased Purchasing Power
A weaker dollar is going to mean that commodities like oil and food will cost more. At the same time, Americans aren’t earning more money than they were six or 12 months ago. In essence, that loaf of bread or basket of corn will require more dollars than it did before QE2 set in.
Bigger Banks and Bottom Lines Benefit
QE2 is really geared toward pushing big banks and investors to spend. The general concept is that the purchasing of government bonds “should push investors into riskier assets — such as stocks and corporate bonds — and raise their value,” according to the Wall Street Journal. This is a period of “easy money.” But there’s typically little to no impact on the average consumer’s savings and money market accounts.
Will It Work?
The Fed reiterated its commitment this week to a second round of quantitative easing. The central bank has already purchased more than $114 billion in Treasuries since mid-November.
Economists are split on what this second round will accomplish. It’s unclear whether this rolling injection of cash into the economy will lead to job creation and temper unemployment. In the short term, it’s certainly likely to raise the tempers of some ordinary consumers as they face the prospect of doing more with less.