The Fed monetary stimulus looking for solutions to stop liquidity trap

The Federal Reserve is hoping to find a way to bring the U.S. back to where it way before the economy collapsed by working with the money supply. The Fed is purchasing U.S. Treasury notes and bonds and is also getting interest from mortgage backed securities to try and keep all the interest rates down to a near zero rate. Monetary stimulus, or quantitative easing, is what we call this and will be putting more cash into the market. Interest rates should be going down with the money supply expanding monetizing debt. Businesses and consumers will want to borrow and spend more, because savings basically earns no interest.

Economic outlook concern coming wit Fed’s monetary stimulus

The monetary stimulus was tried before and didn’t do anything to help the economy recover. What the Fed is doing with this second round of quantitative easing, called QE2, could be probably the most significant since the Fed starting getting assets all the way back in 2008. Right now it appears that just the announcement of QE2 is having an opposite affect than planned. The Fed announcing an additional round of monetary stimulus means it is concerned about the economy’s state. The announcement made the market become a thing of doubt. Stocks plunged. Talk swirled of Japanese-style deflation, where no amount of monetary stimulus is enough to jump-start economic growth.

QE2 a big gamble for the Fed

The Fed’s monetary stimulus is a risky move, as outlined by The People’s Voice. To avert the worst of the housing crisis, the Fed purchased more than $ 1 trillion in Fannie Mae and Freddie Mac securities to push mortgage rates to record lows. Fed officials wondered publicly how they were possible going to get rid of all these securities. Mortgage rates can be forced to go up because economic recovery isn’t really getting better. The Fed will be collecting principal and interest with this portfolio adding to billions. Using the cash to monetize debt is loaded with risk. There could be foreclosures with a weakened market like this. If, and some say when, that happens, the Fed will be sitting on billions of dollars of credit losses on its portfolio.

Falling into a liquidity trap

A textbook economy would do really well with the Fed’s monetary policy being made. The demand, of course, is assumed to meet the supply, as outlined by Daniel Indiviglio. Interest rates are already very low, yet companies continue to sit on cash because they aren’t certain that the demand will exist in the near-term to expand. Since the future is so uncertain, consumers want more than anything to just get out of debt. These conditions are what economists refer to as a liquidity trap. When nobody wants to borrow right now, it makes it extremely hard for the Fed to help by lowering all of the interest rates.

Find more info on this subject

Reuters

reuters.com/article/idUSN1123481920100811

The Peoples Voice

thepeoplesvoice.org/TPV3/Voices.php/2010/08/11/monetizing

Atlantic

theatlantic.com/business/archive/2010/08/will-the-feds-new-monetary-stimulus-help/61327/