By Mark Thoma and Tim Duy
A June 23 guest viewpoint by Phillip Romero and Riaan Nel discussed the Federal Reserve’s large-scale asset purchase program — the second round of quantitative easing, popularly known as QE2. The commentary contained a number of misconceptions about monetary policy that might interfere with people’s ability to gauge the success of the Federal Reserve’s actions during the crisis.
The first potential misunderstanding is about how monetary policy affects the economy. Traditionally, the Federal Reserve eases monetary policy by lowering short-term interest rates. This reduces the cost of borrowing and stimulates economic activity.
But what if, as now, short-term interest rates are already near zero and cannot be lowered further? Does this mean there’s nothing the Fed can do to help the economy?