Fed's Strategy to Boost Economy

With congressional gridlock firmly in place, Bernanke is opting to use innovative monetary policies to boost economic growth.  This November 4th, 2010 Bloomberg article analyzes its potential success.  In my Principles of Macroeconomics class, we talk about traditional ways to create jobs through monetary policy.  The main strategy involves buying bonds through Open Market Operations which pushes down the yield of the Fed Funds Rate.  The Fed Funds Rate is a key interest rate where all other interest rates are tied to.  However, the Fed already utilized this strategy and the Fed Funds Rate is essentially zero. 

Bernanke is now embarking on a new innovative monetary policy tool that was used to lift us out of our financial crisis a couple of years ago.  It is called quantitative easing, which essentially involves selling U.S. Treasury T-bills, which mature in less than a year, and use the proceeds from those sales to buy longer term U.S. Treasury bonds.  By buying U.S. Treasury bonds, this process will lower their yields.  Lower yields mean lower interest rates for businesses and consumers alike.

While I discuss this policy in more detail in "Jumpstarting Our Economy", we now know that the Fed has decided to buy $600 billion in U.S. Treasuries through June.  This figure was a little more than the consensus take of $500 billion of economists.

A survey of economists on the future trend in the unemployment rate was discouraging.  They anticipate that the unemployment rate will remain above 9% or above until the first quarter of 2012.  As of right now, the U.S. unemployment rate is at 9.6%.