Economic Issues Concerning the Federal Reserve Policy (Quantitative Easing)
It is common for central banks to regulate economies by setting prices of money through the use of official interest rates. Quantitative easing has been defined as the unconventional monetary policy that central banks use by purchasing government securities and other securities in order to increase the supply of money in the economy while maintaining low interest rates (Klyuev et al., 2008).
This approach does not involve an increase in money supply through additional printing of banknotes. It is adopted when the short-term interests are standing or approaching the zero mark (Klyuev et al., 2008). However, despite the need to adopt such a move, some economic issues have been impacted negatively. The approach has regularly been adopted with an attempt to reduce inflation, unemployment and long-term interest rates. It is the role of the Federal Reserve Bank (Fed) to ensure that level of unemployment, inflation, and interest rates are kept at the lowest levels possible.
In an attempt to ensure the above-mentioned scenario, Fed will buy securities from the government and other holders. By so doing, it is anticipated that borrowers will be able to secure loans from financial institutions. However, this idea may be considered as not being lining up. From a monetary perspective, an increase in money supply in an economy without increasing goods and services will result into an inflationary economy.
Eventually, this will lead to an increase in the interest rates. In that case, it can be argued that, quantitative easing does not necessarily address the challenges of inflation and interest rates. In addition, the resulting effect will be such that, consumers will not be able to have enough financial resources to acquire goods and services.
In other words, it will mean that producers and businesses will not be willing to hire any workers. This is because no individual or business enterprise will be willing to hire a worker to produce goods and services without any one purchasing them. Ultimately, the scenario will indicate that the un- employment challenge will continue. This phenomenon shows that, adopting quantitative easing may not help much in addressing the three economic issues, interest rates, inflation, and an upsurge in unemployment crisis.
In fact, according to researchers, spending by consumers is the only solution that will help address job creation challenge (Whittington, 2014). Money obtained from Fed spending is used by financial institutions and business enterprises to acquire more bonds and securities, as opposed to a scenario where they could use such money to lend it out. Lending out the money would have helped in stimulating job creation and eventually expanding the economy.
From an economic perspective, financial institutions would be willing to lend their money at relatively higher interest rates. On the contrary, businesses and individuals would be willing to borrow at relatively lower interest rates. In that case, the resulting effect will be retarded economic growth and stalling job creation. There is a strong correlation between the three major economic indicators, inflation, interest rate, and un-employment (Whittington, 2014). It implies that, while trying to adopt quantitative easing, central banks should take into consideration unemployment and inflation rates, and not only easing interest rates.
From the discussion, it is clear that quantitative easing can be seen as being an imperfect economic policy to perfect the three major economic indicators. The assertion is that central banks should equally focus on other monetary policies in trying to ease economic downturns within any macroeconomic system.