If short-term interest rates are near zero, how is quantitative easing supposed to help?
The purchase of longer term Treasury bonds (as opposed to short-term Treasury bills) may put downward pressure on longer term interest rates. However, monetary policy is about growth in money and credit as well as interest rates. Money supply growth has been slow for the circumstances of a deep recession and slow recovery, so the Fed hopes to speed it up. It hopes that banks will use the new funds to lend more to businesses and consumers. Some critics argue that since banks already have excess reserves and large corporations are flush with cash, even more liquidity won’t stimulate the economy but will cause inflation. What’s wrong with that argument? First, new money must be spent to be inflationary. If it is spent, then it should also (or primarily) stimulate the economy. Actual inflation is down to near 1 percent and there is a great deal of slack in the economy – manufacturers and businesses aren’t utilizing all of their productive capacity and the unemployment rate is stubbornly hi
