Once upon a time, Harvard economist Greg Mankiw concocted a mathematical formula for predicting how the U.S. Federal Reserve would set its basic interest rate for U.S. banks: the Federal Funds Rate.
What makes the formula unique is that it incorporates data that captures the Federal Reserve's dual mandate, where it has been specifically directed by the U.S. federal government to promote policies that provide for price stability and for full employment, which it primarily does by periodically adjusting the value of the Federal Funds Rate, which in turn, affects nearly all other interest rates in the United States.
We say "primarily" because since January 2009, the Federal Reserve's Open Market Committee, the secretive gang of President-appointed and Congress-approved bankers who set the Federal Funds Rate, ran into a fundamental problem - they couldn't lower the value of the Federal Funds Rate to go below 0% as the U.S. economy entered into a highly deflationary environment with the worsening of a recession.
So the Fed had to turn to more exotic methods to try to stabilize prices, which were falling, and to maximize employment, which was also falling. And that's where the concept of quantitative easing came into play. Investopedia defines and explains:
Definition of 'Quantitative Easing'
A government monetary policy occasionally used to increase the money supply by buying government securities or other securities from the market. Quantitative easing increases the money supply by flooding financial institutions with capital, in an effort to promote increased lending and liquidity.
Investopedia explains 'Quantitative Easing'
Central banks tend to use quantitative easing when interest rates have already been lowered to near 0% levels and have failed to produce the desired effect. The major risk of quantitative easing is that, although more money is floating around, there is still a fixed amount of goods for sale. This will eventually lead to higher prices or inflation.
Political Calculations is a site that develops, applies and presents both established and cutting edge theory to the topics of investing, business and economics.
Be the first to read Political Calculation's column. Sign up today and receive Townhall.com delivered each morning to your inbox.
Today, at 11:20 AM PT: Get the Market Movements in Advance: William's Edge Webinar for October 24th, 2014 | John Ransom
In Other News: List of "Useless Government Spending" Strangely Doesn't Include Biden's Salary | Michael Schaus
In Other News: Massachusetts School Board Moves to the Right of Democrats - Becomes Socialist | Michael Schaus
Today, at 11:20 AM PT: Get the Market Movements in Advance; Williams Edge Webinar for October 20th, 2014 | John Ransom