Any major move by the Federal Reserve in the heat of a presidential campaign will bring controversy, and Thursday’s announcement by Bernanke that the Fed would consume an added $40 billion a month in mortgage-backed securities was no exception.
The move, dubbed QE3 for the third round of so-called quantitative easing by the Fed, an effort to keep long-term rates down and infuse money into the economy, raises several risks. Among them, by sending a signal to businesses and consumers that rates will stay low for years to come, the Fed could cause people to postpone spending decisions — exactly the opposite of what’s intended.
Greg Ip, U.S. economics editor for The Economist, explains how it works and why Bernanke pulled the trigger, finally deciding the economy wasn’t getting better on its own.
The markets obviously were pleased. Despite more turmoil in the Middle East, the Dow surged by 203 points to a post-recession high.
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