by Caitlin Kenney

If you missed Adam Davidson's live chat earlier today, you can check it out here. One of the things Adam addressed was the Fed's decision to inject $1 trillion into the financial system by purchasing Treasury bonds and mortgage securities.

Geneva, Switzerland: Could you comment on the Fed injecting $1.2 trillion into the markets? Over in Switzerland, we noticed the dollar fall against the euro and CHF almost immediately upon this announcement. The WP article starts out "The Federal Reserve yesterday escalated its massive campaign to stabilize the economy..."Is this move supposed to be reassuring? To me (non-economist) it just seems desperate, like they are scraping the bottom of their tool chest.

Adam Davidson: I think desperate isn't too far off. The Fed is in a very tough position. Normally, it can respond to a slow economy by lowering interest rates. That encourages borrowing, which tends to make the economy speed up. But the Fed's short term interest rate is at zero. That means it can't go any lower. The Fed's main tool to stimulate the economy is broken. Useless.

 

So, the Fed is doing what many believe is the appropriate action at what is called the "zero bound." They are figuring out all sorts of ways to push money into the economy to encourage more borrowing and spending and to try to get things growing again.This process is much less frequently used (we are way beyond unprecedented territory by now for the US) and much more poorly understood.Fed officials don't actually know, with any precision, how much money they should put into the economy or how long it will take to see an impact.

I'm sure they're having some desperate hours. But just because it's desperate doesn't mean it's the wrong thing to do. Desperate times call for desperate actions, and all that.