This post was originally written as part of a response to a family member who had asked about the effects of the Federal Reserve’s QE decision earlier this month. Haven’t heard about it? That’s because the announcement was largely ignored by the mainstream media. This decision will affect us, but how strongly (in the form of inflation) and how quickly is yet to be proven. During times of slow inflation, wages rise to meet prices. It’s the in-between time when wages are low and prices are higher that affects weary consumers.
Quantitative easing; what is it and how will it affect me? Earlier this month the Fed shelled out $600 billion to banks (through the purchase of bonds) to increase the money supply. This was a huge effort to reinvigorate the economy, a serious action taken only after traditional efforts towards stimulation (direct job creation and interest rate lowering) had failed. At best, this influx of money will indeed be routed to consumers and businesses, through banks, and result in controlled expansion. This QE action signals a change in Fed policy: no longer is inflation the Fed’s #1 enemy, now they are actually encouraging it in hopes that an influx of monetary supply will encourage spending (demand). My personal opinion? This does not bode well for our long-term economic outlook. The Fed has been committed to fighting inflation since its inception, and such a drastic change in policy is clearly a last-ditch effort at reviving the economy. I’m not fearful because inflation in itself, though undesireable, doesn’t pose a threat to my family. Hyperinflation would scare me, but I personally don’t see that as a likely economic response to this action. A couple of interesting links regarding this topic: Wikipedia on Quantitative Easing, Easing Explained, and QE Big Banks & Inflation.