By BankingMyWay.com Staff
In mid March, the Federal Reserve announced that it would buy $300 billion of long-term Treasuries in an effort to get the economy moving. The Federal Open Market Committee (FOMC) met in Washington and unanimously voted to approve the move.

This latest strategy is part of The Fed’s ongoing endeavor to increase the money supply in the U.S. economy. When the economy first started to slow, The Fed attempted to increase the money supply in the market by lowering interest rates. The Fed has continually cut interest rates since, and currently, interest rates are near zero with nothing additional left to cut.

Unfortunately, the rate cuts seemed to have little to no effect on the deepening recession. The unemployment rate is at 8.1 percent, higher than it’s been in a quarter-century. Despite the cost of borrowing dropping to almost nothing, the credit markets have remained nearly frozen.

Consequently, The Fed has pulled another tool from its bag of tricks -- quantitative easing. Quantitative easing is the process of forcing more money into the economy in order to stimulate the economy.  The practice is often referred to as “printing money.” By buying a massive quantity of Treasuries, interest yields on government bonds are reduced. Benchmark 10-year note yields fell from 3.01 percent to 2.48 immediately, which was the largest decline in decades.

As a result, there are many critics of quantitative easing and of this particular move by The Fed. Injecting money into the economy carries the real danger or increasing inflation. At the moment, however, deflation rather than inflation is the dominant worry. The Fed prefers to keep inflation at an average rate at 2.2%, and it has been below that rate this year. Foreign central banks are all considering, with some already implementing, similar policies and strategies to stimulate money flow. Getting the credit markets moving is a top priority for the Fed and is key to getting the country out into recovery. If the quantitative easing strategy is successful, The Fed can then take measures to limit any inflationary consequence.

Since the announcement of the massive buy of Treasuries, the stock market has rallied. The S&P 500 stock index surged 2.1% on the news alone. Broader optimism has driven the stock market up in subsequent weeks, and the Dow has recently traded, though not closed, above 8000.  The Dow hasn’t been at that level since the beginning of February 2009. World markets are also rallying.

The quantitative easing also seems to be driving down primary mortgage rates even further than they have been. According to BankingMyWay.com, national average interest rates on a 30-year fixed mortgage fell from 5% to 4.92%. With the cost of mortgage borrowing lower than it has been in nearly four decades, the hope is that home sales will rise and boost the economy along with it.

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