The Federal Reserve is planning to launch monetary QE2, the purchasing of bonds with newly printed money. Expert from Joseph Stiglitz predicts the move will prove ineffectual or dangerous. I agree with this assessment. In the short run, increasing the money supply will lower the interest rate further. In the long run, this increase will increase inflation and increase the nominal interest rate. If the fed isn’t careful, their policies may create additional trouble in the future.
The committee believes this program will “promote a stronger pace of economic recovery and help ensure inflation, over time, is at levels consistent with its mandate…” Seeing a drop in the 10 year bond yield from 2.65% to 2.53% may support the Feds position that we need to do something to help future inflation.
Don Kohn, former Fed vice-chair, says that while not impossible, it is unlikely QE2 will drive prices up dramatically. Instead, once credit loosens and spending accelerates, he believes the Fed will again tighten policy.
isn't this going to cause seinorage ?
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