Quantitative easing is still a relatively new tool of monetary policy, and its impacts are not well-understood. Some of the consequences of quantitative easing are known: supporting certain favored financial institutions, increasing the supply of money in the economy, lowering interest rates and affecting investor confidence. It remains to be seen how consumers are ultimately affected and whether it impacts certain consumer segments more than others.

What Is Quantitative Easing?

Central banks pursue quantitative easing as a form of expansionary economic policy. The goal is to stimulate borrowing and consumer spending in hopes of raising aggregate demand. It is performed in a similar manner to more traditional government bond purchase programs except that the central bank is buying financial assets from commercial banks and other private institutions. This strategy is implemented when short-term interest rates are near zero and standard monetary policy would be less effective.

When the Federal Reserve buys financial assets from another bank, it creates new money for the purchases. Theoretically, the banks can then lend out the new money to generate economic growth. This policy also has the added effect of lowering interest rates in the economy, since the supply of available funds has increased.

Economic Consequences of Quantitative Easing

Economists and policy analysts disagree about the consequences and effectiveness of quantitative easing. However, certain financial institutions have to be chosen to purchase assets from, giving them a competitive advantage over those that are not chosen, although this is likely to have only indirect and cursory implications for consumers.

The lowering of interest rates in the economy encourages consumers to borrow more, spend more and save less. Traditional forms of savings and retirement planning (such as demand deposit accounts and government bonds) become less attractive, forcing some savers to look for riskier investments to generate sufficient returns.

According to the quantity theory of money, large injections of liquidity through the banking system can lead to large levels of inflation. The speed and level of inflation would depend on the velocity of money. If large commercial banks decide to sit on their central bank money rather than lending it out, new money would circulate much more slowly in the economy. If prices rose, consumers would find themselves relatively worse off.

However, if the quantitative easing of the central bank leads to reduced unemployment, higher investor confidence and more business activity, then consumers would be better off. On the other hand, an economy that does not respond to quantitative easing might concern investors and depress growth even further.

Macroeconomic policy – whether through regulation, stimulus, trade or taxes – is notoriously difficult to evaluate. Economics is not a readily testable and verifiable science, such as physics or chemistry; no controlled experiments can be run. Even if the Federal Reserve correctly selected the right combination of variables to adjust, it would still have the problem of having to wait for the economy to respond. Even then, deciding which metrics to use for assessment is equally controversial. Even in broad, relative terms, it is difficult to propose whether quantitative easing makes consumers better or worse off.

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