The Fed is doing two things right now to stimulate the economy. One is holding their interest rates pretty much at 0%. The other is buying $85 billion in housing and treasury bonds each month in order to try and pump money into the economy.
At some point, the Fed intends to begin backing off these policies. But they only want to do it once the economy is strong enough, and even then, they want to do it slowly, so the economy has time to adjust.
To put it differently, rather than cut off their support, they want to "taper" it.We will discuss both the Federal Reserve and monetary policy on 2305 in a few weeks. Monetary policy refers to - according to Wikipedia -
". . . the process by which the monetary authority of a country controls the supply of money, often targeting a rate of interest for the purpose of promoting economic growth and stability. The official goals usually include relatively stable prices and low unemployment.Here's a secondary definition:
Monetary policy is the process by which the government, central bank, or monetary authority of a country controls (i) the supply of money, (ii) availability of money, and (iii) cost of money or rate of interest to attain a set of objectives oriented towards the growth and stability of the economy.The setting of interest rates is a standard part of the fed's toolkit, the purchasing of bonds is not. The purchasing of the bonds has a fancy name: quantitative easing. It means:
. . . an unconventional monetary policy used by central banks to stimulate the national economy when standard monetary policy has become ineffective. A central bank implements quantitative easing by buying specified amounts of financial assets from commercial banks and other private institutions, thus increasing the monetary base. This is distinguished from the more usual policy of buying or selling government bonds in order to keep market interest rates at a specified target value.The big news this week is that the Fed decided not to cut back on the amount of bonds it is purchasing - that is what "the taper" refers to.
Why? Here's one answer: Because Congress is horrible.
Which fits a theme in 2305 so far - 2306 too, sort of. One of the major differences between the design of the legislative and executive branches in the US Constitution is that Congress' design lends itself to stalemate and dysfunction. This is due to its democratic nature, which is why Congress has done an awful job handling the economy.
The executive has more of an autocratic design, and many of its agencies - the Federal Reserve included - are designed to be able to act swiftly to address problems they have been designated to address. For that reason the Federal Reserve has been in a much better position to grow the economy than Congress. Its the nature of the beast.
