by Caitlin Kenney

The Federal Reserve's decision to buy $1 trillion in Treasury bonds and mortgage securities comes at what's called the Zero Bound. The Fed has already lowered its key interest to nearly zero, and now it has to find new ways to get money into the economy to get it moving again.

Looking around for more information on the zero bound, I came across this 2004 paper "Monetary Policy Alternatives at the Zero Bound: An Empirical Assessment" written by none other than Federal Reserve Chairman Ben Bernanke. (It's nice to know he's been studying it.) The paper can be a bit dense at times, but it does provide a good analysis of "quantitative easing."

 

Here's a bit:

Central banks normally lower their policy rate through open-market purchases of bonds or other securities, which have the effect of increasing the supply of bank reserves and putting downward pressure on the rate that clears the reserves market. A sufficient injection of reserves will bring the policy rate arbitrarily close to zero, so that the ZLB rules out further interest rate reduction. However, nothing prevents the central bank from adding liquidity to the system beyond what is needed to achieve a policy rate of zero, a policy that is know as quantitative easing.