What is QE2 and What Could It Mean for Average Americans?

February 21, 2011 | Posted By: Chris Birk
Consumers across the country are waiting to see what impacts arise from the governmentís plan to inject billions into the economy in an attempt to spur growth.

The controversial concept, known as quantitative easing, isnít a common and everyday topic in most households. But this latest round of easing, dubbed QE2, has the potential to put a serious stamp on bottom lines nationwide.

What is QE2?

Essentially, quantitative easing is when the U.S. central bank, the Federal Reserve, purchases government bonds. The move is aimed at lowering long-term interest rates, boosting access to credit and, in theory, accelerating job growth.

The Fed announced in November that it would purchase $600 billion in Treasury Bonds and pump another $300 billion into the economy by using proceeds from investments.

The move comes after the central bank already purchased $1.8 trillion at the end of FY 2008 and 2009. Some observers worry the capital injection could lead to hyperinflation, weakening the dollar and sending commodity prices through the roof.

Proponents believe an earlier round of quantitative easing helped stave off full-blown depression and that a second round will help businesses get their footing.

What Does it Mean for Average Joes?

For a lot of consumers, this kind of economic policy talk is better than a sleeping pill.

But, as dry and boring as it can sounds, this second wave of quantitative easing could have a serious impact, both good and not so good, on households everywhere. Here are a few ways:

  • Lower interest rates: Borrowers will likely enjoy record-low rates for the time being, making it a great time to purchase or refinance a home. The flip side is that if the Fed suspects inflation is nearing a problematic level, it would likely respond by hiking rates.

  • Higher Costs at Home: A second round of easing could ultimately lead to higher commodity prices if the dollar weakens. That would drive up the cost of necessities and goods. A weak dollar would also decrease purchasing power, meaning things like sugar and soybeans would cost even more.
  • Little Direct Benefits: Homeowners and other consumers wonít generally see any positive effect on their bottom lines. Business owners and wealthy investors stand to gain as access to credit loosens, but thereís little for the average American to grab hold of or point to.

Whatís the Likely Outcome?

Economic experts and others continue to debate the success of QE2 so far.

A recent Bloomberg poll of investors, traders and analysts highlighted the mixed reviews. Only 27 percent said that QE2 was working as intended. A third claimed the additional round of easing risked triggering dangerous levels of inflation.

At this point, itís tough to say what the final impact of QE2 will be. But for the average American, this latest economic gambit will likely bring little in the way of significant change for the better.

The reality is that many consumers may wind up having to pay more to get less.
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Comments
February 21, 2011 | Posted By: FrugalFreaky
I say leave it alone and let it work it self out. It won't hurt folk to learn to save and learn to spend wisely and cut out excesses like name brands, overpriced hype from our daily lives. I think this recession has been a great classroom.
February 23, 2011 | Posted By: SummitStyle
Agree
leave it alone let it work itself out.
February 26, 2011 | Posted By: Barabas
Average American gets poorer and poorer, top 1% Americans get richer and richer.
February 27, 2011 | Posted By: crazyforadeal
Well, this would be in line with all the other "ideas" the government has had: social security, bail-outs, healthcare bill, welfare, homeland security, etc... our rights, freedoms and liberties are systematically being undermined. Without God as the foundation...we are destined to fail as a Nation...
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