Fighting off a recession is certainly not easy, and the world is going through a tough time economically. Many people are worried about the future of the economy with job losses piling up high. One tool that can be used to help fight a recession is known as quantitative easing. If you don’t know anything about quantitative easing, then you can read on to get the basics.
Understanding How Quantitative Easing Works
Quantitative easing is a process where the government will purchase lots of assets so that long-term interest rates can be pushed down. It can also provide a fast boost to the economy in many ways. For the most part, these asset purchases will be centered around US Treasury and mortgage-backed securities. This is not a normal move for the government to make, but it could be a tool to help fight off a particularly bad recession.
In normal times, the Fed will fight a recession by making adjustments to the federal funds’ interest rate. Lowering the borrowing rate has the potential to stimulate economic recovery, and you have already seen America do this in response to the current recession. This method only has an impact on the short-term rates, though, and quantitative easing can help with long-term ones.
During the recession of 2007-2008, the Fed slashed the interest rates and the economy still went tumbling. This caused them to make use of the first round of quantitative easing to turn things around. It can take bonds off of the market and give banks more cash that can be used. This method can be helpful, but whether or not it is necessary for the current recession remains to be seen.
Could Quantitative Easing Turn Things Around?
If necessary, quantitative easing measures could help the economy by making lending much easier. It can boost economic growth potential in a time when economic growth has stymied. However, it’s likely best to only make use of this method if it becomes necessary. As of now, the government has not deemed quantitative easing as something that must be done.