The Federal Reserve recently announced it will soon begin its second round of “quantitative easing” since December 2008. Dubbed QE2, the plan calls for the Fed to spend $600 billion to purchase government debt over the next eight months.
Basically, banks will sell treasury bonds and mortgage-backed securities from their holdings to the Fed, which hopes the newly-circulated cash ends up in the hands of businesses and individuals to invest and spend. Despite some recent reports of a slight up-tick in the economy, the Fed sees the recovery as “disappointingly slow,” thus prompting the QE2 plan.
Federal Reserve to Begin QE2
The strategy is controversial, with some observers expressing concern about the potential risks of high inflation and a lack of evidence that quantitative easing works at all. Nevertheless, most economists see the size of the plan as relatively modest, and thus less risky. As a renowned student of the Great Depression, Fed Chairman Ben Bernanke has expressed confidence the new policy is the right thing to do and is helping already. It appears the stock market, at least, may agree. Since Chairman Bernanke signaled QE2 in a late-August speech, the S&P 500 has climbed about 15 percent.