Saturday, October 30, 2010

Why the Fed's bold move won't work

The Fed is trying to pump more money into the system next week and their are some economists worried that this is going to be a bad idea. The plan is to jump start the struggling economy by purchasing billions in new asset's. Hopefully this will encourage more spending because interests rates will be driven down, which will encourage more spending by small businesses and consumers. The reason the Fed is doing this again is because they made about $2 trillion last time they did this during the great recession. There are potential problems to this idea though that need to be looked at. One it could create a new asset bubble in the financial market, two inflation could greatly rise, or finally it could cause a trade war with some of the U.S. trading partners because of the value of the dollar. By doing this big move economist should be certain that it will work because there is going to be a lot of money involved. So, they need to be certain that it will work, which some of the economists are not. It will be a risky investment in my opinion.

2 comments:

Mesaban C. said...

I also think this is a risky asset, but this is only one of the few tools that the Fed has left in its toolbox. With the investors' expectation for the Fed to jump in and help, the Fed cannot do anything except to follow what the people calls for.

Sean-Paul said...

It seems like the FED has been contemplating this action - referred to as 'quantitative easing' - for some time now, but have been reluctant to implement because of a fear of inflation. Now that those fears have seemed to be brushed aside, the question has become how many assets the FED will purchase.