Several weeks ago, the Federal Reserve decided not to cut back, or taper as the finance mavens say, the billion-dollar bond buying program known as quantitative easing, which is a euphemism for printing money. A gradual reduction of QE had been expected since June, when Fed chairman Ben Bernanke said the economy was getting stronger and he might reduce the monthly purchases by the end of the year.
But the Fed got cold feet and changed its mind because its leaders don’t believe that economic activity and labor market conditions are strong enough to merit reducing the bond purchases. Economic growth is lackluster. The unemployment rate is too high, labor force participation is at a 34-year low and too many newly created jobs are low paying and/or part time. Consequently the Fed will continue buying $85 billion of treasury and mortgage bonds each month and remain committed to holding short-term rates near zero at least so long as the unemployment rate remains above 6.5 percent.
So the training wheels stay on the bicycle and continue to feed an addiction to cheap money.
After five years of depending on a monthly injection of liquidity, it may well be that QE will become a permanent tool of the Fed for managing the business cycle and garden variety recessions. Since it began in the Paleozoic era, circa late 2008, the Fed has hoped that QE would stimulate economic growth and hiring by holding down interest rates and encouraging households and businesses to spend and invest.