Will the Fed end quantitative easing?
JEREMY HOBSON: Now let’s get to the Fed. Policymakers are wrapping up a two day meeting in Washington. And when they do we’ll hear what the Fed plans to do — or not do — for the economy going forward.
Richard DeKaser is an economist with the Parthenon Group. He’s with us live, as he is each Wednesday, from Boston. Good morning.
RICHARD DEKASER: Good morning.
HOBSON: First of all, we’re not expecting any change in interest rates. Is that right? Those are going to stay pretty low?
DEKASER: That’s right.
HOBSON: And what about this other thing that we hear about every time we hear about the Fed, and I don’t usually like to use this term but it’s quantitative easing. Why don’t you tell us first of all what that’s all about.
DEKASER: Sure I mean, literally it is increasing the quantity of money with the intention of easing economic conditions and promoting economic growth. Now they’ve done this twice already. The first round of quantitative easing was between November 2008 through March 2010. It amounted to $3.1 trillion. During which time they bought U.S. debt — that is treasury securities as well as mortgage backed securities. Now, in the middle of last year we had a bit of a soft patch in the economy. They decided to go for round two, or quantitative easing two. That began in November of last year. It’s scheduled to run through June of this year — another $600 billion focused all on treasuries. This is all about trying to provide money to banks to encourage banks to lend, and to provide lower interest rates, which encourages economic activity.
HOBSON: And today we’re going to find out whether they are going to end that quantitative easing on schedule, or continue it, or stop it early.
DEKASER: That’s exactly right. Those are the three options and the most likely case is stay the course.
HOBSON: OK, now put this in the context for us, Richard, of what else is going on in Washington. There’s this big debate over the debt ceiling and whether there are going to be cuts coming. Is the Fed paying attention to what’s going on in Congress?
DEKASER: Absolutely. The Fed is focused like a laser beam on what’s happening in Congress because there’s a lot of talk now about deficit reduction over the long term. If that were to occur — and that’s a big if — the Fed would surely be easier with monetary policy because tighter fiscal policy tends to restrain the economy, they compensate with easier monetary policy. So they’re focused like a laser beam on this. I don’t think we’re going to have an conclusions any time soon, but this is going to be a long part of their watching and waiting game.
HOBSON: Richard DeKaser economist at the Parthenon Group. Thanks so much.
DEKASER: My pleasure.
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