The Federal Reserve Board’s policy of qualitative easing has helped the stock market recover. But Americans who work in the real economy are still struggling.
Qualitative easing is the Federal Reserve Board’s policy of creating new money to buy Treasury bonds in order to keep interest rates low. The greater the demand for bonds, the lower the interest rates, and the interest rate on Treasury bonds is generally the benchmark on all Treasury bonds.
The Fed’s Operation Twist was a sale of medium-term Treasury bonds and purchase of 10-year bonds. The Federal Funds rate is the interest rate for overnight loans among banks so they can meet the Federal Reserve’s requirement for reserves.
The chart above shows how QE correlated with the ups and downs of the stock market. But, as I indicated in a previous post, American corporations did not advantage of low interest rates to invest in their businesses. Instead they have transferred the gains to stockholders in the form of stock buybacks.
An economic recovery has taken place. Most Americans are better off than they were at the depths of the crash. But as economic recoveries go, this one has been weak.
The chart shows how important is it to always adjust for inflation. A dollar in the year 2000 is not the same thing as a dollar in the year 2016.
Although corporate executives did not take advantage of Qualitative Easing to invest in America, there was nothing besides politics holding back the federal government from investing in public works. There is a lot of urgent work that needs to be done in maintaining and upgrading American’s physical infrastructure, such as upgrading public water systems to get the lead out.
With a lot of public work that needs to be done, a lot of people who need work and financing costs at historic lows, why not put the unemployed and under-employed to work doing what needs to be done? Fiddling with interest rates and the money supply is not enough.