Dr. Jenson Mak discusses the basics of quantitative easing.

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The Basics of Quantitative
Easing
by Jenson Mak | Mar 16, 2022 | Dr. Jenson Mak
Fighting off a recession is certainly not easy, and the world is going through a
tough time economically. Many people are worried about the future of the
economy with job losses piling up high. One tool that can be used to help fight a
recession is known as quantitative easing. If you don’t know anything about
quantitative easing, then you can read on to get the basics.
Understanding How Quantitative Easing
Works
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Quantitative easing is a process where the government will purchase lots of assets
so that long-term interest rates can be pushed down. It can also provide a fast
boost to the economy in many ways. For the most part, these asset purchases will
be centered around US Treasury and mortgage-backed securities. This is not a
normal move for the government to make, but it could be a tool to help fight off a
particularly bad recession.
In normal times, the Fed will fight a recession by making adjustments to the
federal funds’ interest rate. Lowering the borrowing rate has the potential to
stimulate economic recovery, and you have already seen America do this in
response to the current recession. This method only has an impact on the short-
term rates, though, and quantitative easing can help with long-term ones.
During the recession of 2007-2008, the Fed slashed the interest rates and the
economy still went tumbling. This caused them to make use of the first round of
quantitative easing to turn things around. It can take bonds off of the market and
give banks more cash that can be used. This method can be helpful, but whether
or not it is necessary for the current recession remains to be seen.
Could Quantitative Easing Turn Things
Around?
If necessary, quantitative easing measures could help the economy by making
lending much easier. It can boost economic growth potential in a time when
economic growth has stymied. However, it’s likely best to only make use of this
method if it becomes necessary. As of now, the government has not deemed
quantitative easing as something that must be done.
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