What is 'Easy Money'

Easy money, in academic terms, denotes a condition in the money supply. Easy money occurs when the U.S. Federal Reserve allows cash flow to build up within the banking system, as this lowers interest rates and makes it easier for banks and lenders to loan money. Therefore, borrowers can acquire money more easily from lenders.

BREAKING DOWN 'Easy Money'

Easy money occurs when a central bank wants to make money flow between banks more easily, thanks to lower interest rates. When banks have access to more money, interest rates to customers go down because banks have more money they want to invest. The Federal Reserve typically lowers interest rates and eases monetary policy when the agency wants to stimulate the economy and lower the unemployment rate. The value of securities often initially rises during periods of easy money, when money is less expensive. But if this trend continues long enough, it can eventually reverse due to fear of inflation. Easy money is also known as cheap money, easy monetary policy and expansionary monetary policy.

Inflation

The Federal Reserve must carefully weigh any decisions to raise or lower interest rates based on inflation. If an easy monetary policy may cause inflation, banks might keep interest rates higher to compensate for increased costs of goods and services. Borrowers might be willing to pay higher interest rates because inflation reduces the amount of a currency's value. A dollar does not buy as much during inflation, so the lender may not reap as much profit compared to a time of low inflation.

How Easy Money Works

An easy monetary policy may lead to lowering the reserve ratio in banks. This means banks get to keep less of their assets in cash, which leads to more money going to lenders. Because more cash goes out to borrowers, the interest rates lower. Easy money has a cascade effect that starts at the Federal Reserve and goes down to consumers.

As an example, during an easing of monetary policy, the Federal Reserve may instruct the Federal Open Market Committee (FOMC) to purchase Treasury-backed securities on the open market. The purchase of these securities gives money to the people who sold them on the open market. The sellers then deposit any excess funds into a savings account. The extra money in savings accounts gives banks more money to invest.

Banks can lend the new deposits or invest them in other ways because most of this new money comes to lenders above the minimum reserve amount. Lenders then earn money on the interest for loans and deposit money into other bank accounts. Borrowers spend the loans on whatever they choose, which, in turn, stimulates other economic activities. The process continues indefinitely until such time the Federal Reserve decides to tighten monetary policy.

RELATED TERMS
  1. Tight Money

    Tight money results from a shortage of money, usually when monetary ...
  2. Key Rate

    The key rate is the specific interest rate that determines bank ...
  3. Primary Reserves

    Primary reserves are the minimum amount of cash under U.S. federal ...
  4. Bank Reserve

    A bank reserve is the currency deposit which is not lent out ...
  5. Adjustment Credit

    Adjustment credit is a short-term loan, which a Federal Reserve ...
  6. Interest Rate

    Interest rate is the amount charged, expressed as a percentage ...
Related Articles
  1. Investing

    How the Federal Reserve Devises Monetary Policy

    Learn about the tools the Federal Reserve uses to influence interest rates and economic conditions. Find out the types of action a central bank may take.
  2. Personal Finance

    How the Federal Reserve Affects Your Mortgage

    The Federal Reserve can impact the cost of funds for banks and consequently for mortgage borrowers when maintaining economic stability.
  3. Insights

    How Central Banks Control the Supply of Money

    A look at the ways central banks pump or drain money from the economy to keep it healthy.
  4. Personal Finance

    5 Mistakes You're Making With Money Market Accounts

    Money market accounts can be helpful "parking spots" for investors. Here are five key things to keep in mind when opening an account.
  5. Insights

    The Top 6 Ways Governments Fight Deflation

    Here are six monetary and fiscal policy tools that governments use to fight deflation.
  6. Insights

    How Monetary Policy Affects Your Investments

    Monetary policy changes can have a significant impact on every asset class. investors can position their portfolios to benefit from policy changes and boost returns by being aware of the nuances ...
RELATED FAQS
  1. What are the implications of a low federal funds rate?

    Find out what a low federal funds rate means for the economy. Discover the effects of monetary policy and how it can impact ... Read Answer >>
  2. What happens if the Federal Reserve lowers the reserve ratio?

    Learn about the Federal Reserve's monetary policy and the tools it uses to control it. Understand what happens if the Federal ... Read Answer >>
  3. How do open market operations affect the U.S. money supply?

    Formulating a country's monetary policy is extremely important when it comes to promoting sustainable economic growth. More ... Read Answer >>
  4. Market operation and its effect on Money Supply

    Understand how open market operations affect the supply of money in the economy and learn the specific ways the Federal Reserve ... Read Answer >>
Hot Definitions
  1. Portfolio

    A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
  2. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  3. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  4. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
  5. Current Assets

    Current assets is a balance sheet item that represents the value of all assets that can reasonably expected to be converted ...
  6. Volatility

    Volatility measures how much the price of a security, derivative, or index fluctuates.
Trading Center