STEVE INSKEEP, host:
Even as Americans pause to vote today, the business of America goes on. And that includes the business of the government. Today a key committee of the Federal Reserve begins two days of meetings. Tomorrow we learn how the Fed intends to improve the economy if it can. One possibility is that they would flood the system with more money. NPR's Tamara Keith reports.�
TAMARA KEITH: When it comes to monetary policy, the Federal Reserve has two basic mandates: keep inflation in check and keep the unemployment rate low.�Ken Kuttner is a former Fed economist and a professor at Williams College.
Professor KEN KUTTNER (Williams College): Inflation is below the Fed's comfort zone and obviously 9.6 percent unemployment, that's some distance from full employment, so they feel they have to try something.
KEITH: But the thing they'd normally turn to - a short-term interest rate called the Fed Funds Rate - has been at or near zero for a very long time.�You could say the Fed is out of bullets there. James Hamilton is an economics professor at UC San Diego.
Professor JAMES HAMILTON (UC San Diego): It is time to try something else, and unfortunately those something elses available aren't nearly as effective or reliable as our standard gun.
KEITH: The something else the Fed appears to be loading into the chamber is called quantitative easing. I asked Ken Kuttner if there was a less technical term.
Prof. KUTTNER: Let's see. What is it? What's a good synonym for quantitative easing? We should think about that. That's a good question.�Large scale bond purchases isn't much better, is it?
(Soundbite of laughter)
He emailed later to suggest the somewhat catchier binge bond buying. Basically the Fed would go out and buy hundreds of billions of dollars worth of long-term Treasury bonds. Kuttner says the Fed would mostly buy those bonds from banks. But instead of using existing money, the Fed would just credit the bank's accounts - creating billions of dollars in new money with a key stroke. Or in short...
Prof. KUTTNER: Well, printing money to buy bonds, get interest rates down, juice the economy.
KEITH: Just how this would juice the economy is up for debate. Banks would have more cash on hand - though it's not clear they'd use it to make more loans.�If it works, interest rates would be lower for mortgages and business loans. And all those dollars flowing around could deflate U.S. currency, making American exports more appealing. Or it could be more trouble than it's worth, says Stanford's John Taylor.
Professor JOHN TAYLOR (Stanford University): I don't think it will do much good, and I also worry about the harm down the road.
KEITH: One possible impact is ballooning inflation years out. Japan tried it to get its economy out of a slump - with mixed results. And the Fed itself did a little of the same during the height of the financial crisis. Still, Taylor says we're talking about a largely untested tool.
Prof. TAYLOR: No one knows - even the Fed admits this - they don't know what the impact is going to be. It's very uncertain, so that uncertainty itself creates instability.
KEITH: But if there is still ammunition left to try, James Hamilton at UC San Diego says the Fed ought to give it a shot.
Prof. HAMILTON: I think we should also be nervous about doing nothing. When unemployment is as high as it is now for as long as it's been and as long as it's likely to continue, that's also very damaging and destructive and something sensible people should be very nervous about as well.
KEITH: We'll get more details about the Fed's bond buying plans - and whether they really qualify as a binge tomorrow afternoon.�
Tamara Keith, NPR News, Washington.
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