Finance

The Fed Warms Up The Printing Press

It sounds like the Federal Reserve is about to create a lot more money out of thin air.

The idea would be to help the economy by driving down interest rates for businesses and ordinary people, encouraging everyone to borrow and spend more money. To drive down interest rates, the Fed would probably buy medium- or long-term bonds.

This is known as quantitative easing, or QE, and the Fed has already done it once in the past few years (see "How To Spend $1.25 Trillion"). People are calling the next round QE2.

In the past week, several top Fed officials have suggested QE2 could be coming soon.

Here's the president of the Chicago Fed, in an interview with the WSJ ("accommodation," in the world of the Fed, basically means creating more money):

This is a far grimmer forecast than we ought to have. So yes, I’m in favor of more accommodation.

And the president of the New York Fed said in a recent speech:

Even in today's challenging circumstances, lower long-term rates would support the economy through a number of channels. ... further action is likely to be warranted unless the economic outlook evolves ... .

Ben Bernanke — who spoke highly of bond purchases in a big speech this summer — repeated this week that "additional purchases ... have the ability to ease financial conditions."

And the Fed's Open Market Committee, which makes these sorts of decisions, said last month that QE2 is on the table.

The Fed's leaders clearly aren't united on this front.

The president of the Philly Fed recently said that QE2 would not "have much impact on the near-term outlook for employment," and could "hurt the Fed's credibility."

And the president of the Kansas City Fed has consistently argued that the crisis is over, and the Fed should back off from the policies it's taken to revive the economy. He's said that keeping the heroic measures in place could create another bubble.

Despite these objections, the Fed on balance seems to be leaning toward more action.

"The consensus is starting to form around more asset purchases," an economist at JPMorgan Chase told Bloomberg. "Bernanke doesn't mind that there's open public debate, but when the majority does come to a view, he wants the public and the markets to understand what that view is ... ."

An announcement could come in early November, when the Fed's Open Market Committee has its next meeting.