Tag: asset purchases

In the current environment of low inflation and rising unemployment, the Federal Reserve Bank, the USA’s central bank, has amended its monetary targets. The new measures were announced by the Fed chair, Jay Powell, in a speech for the annual Jackson Hole central bankers’ symposium (this year conducted online on August 27 and 28). The symposium was an opportunity for central bankers to reflect on their responses to the coronavirus pandemic and to consider what changes might need to be made to their monetary policy targets and instruments.

The Fed’s previous targets

Previously, like most other central banks, the Fed had a long-run inflation target of 2%. It did, however, also seek to ‘maximise employment’. In practice, this meant seeking to achieve a ‘normal’ rate of unemployment, which the Fed regards as ranging from 3.5 to 4.7% with a median value of 4.1%. The description of its objectives stated that:


The new targets

Under the new system, the Fed has softened its inflation target. It will still be 2% over the longer term, but it will be regarded as an average, rather than a firm target. The Fed will be willing to see inflation above 2% for longer than previously before raising interest rates if this is felt necessary for the economy to recover and to achieve its long-run potential economic growth rate. Fed chair, Jay Powell, in a speech on 27 August said:


Additionally, the Fed has increased its emphasis on employment. Instead of focusing on deviations from normal employment, the Fed will now focus on the shortfall of employment from its normal level and not be concerned if employment temporarily exceeds its normal level. As Powell said:


The Fed will also take account of the distribution of employment and pay more attention to achieving a strong labour market in low-income and disadvantaged communities. However, apart from the benefits to such communities from a generally strong labour market, it is not clear how the Fed could focus on disadvantaged communities through the instruments it has at its disposal – interest rate changes and quantitative easing.


Modern monetary theorists (see blog MMT – a Magic Money Tree or Modern Monetary Theory?) will welcome the changes, arguing that they will allow more aggressive expansion and higher government borrowing at ultra-low interest rates.

The problem for the Fed is that it is attempting to achieve more aggressive goals without having any more than the two monetary instruments it currently has – lowering interest rates and increasing money supply through asset purchases (quantitative easing). Interest rates are already near rock bottom and further quantitative easing may continue to inflate asset prices (such as share and property prices) without sufficiently stimulating aggregate demand. Changing targets without changing the means of achieving them is likely to be unsuccessful.

It remains to be seen whether the Fed will move to funding government borrowing directly, which could allow for a huge stimulus through infrastructure spending, or whether it will merely stick to using asset purchases as a way for introducing new money into the system.




  1. Find out how much asset purchases by the Fed, the Bank of England and the ECB have increased in the current rounds of quantitative easing.
  2. How do asset purchases affect narrow money, broad money and aggregate demand? Is there a fixed money multiplier effect between the narrow money increases and aggregate demand? Explain.
  3. Why did the dollar exchange rate fall following the announcement of the new measures by Jay Powell?
  4. The Governor of the Bank of England, Andrew Bailey, also gave a speech at the Jackson Hole symposium. How does the approach to money policy outlined by Bailey differ from that outlined by Jay Powell?
  5. What practical steps, if any, could a central bank take to improve the relative employment prospects of disadvantaged groups?
  6. Outline the arguments for and against central banks directly funding government expenditure through money creation.
  7. What longer-term problems are likely to arise from central banks pursuing ultra-low interest rates for an extended period of time?

With the prospects of weaker global economic growth and continuing worries about trade wars, central banks have been loosening monetary policy. The US central bank, the Federal Reserve, lowered its target Federal Funds rate in both July and September. Each time it reduced the rate by a quarter of a percentage point, so that it now stands at between 1.75% and 2%.

The ECB has also cut rates. In September it reduced the overnight deposit rate for banks from –0.4% to –0.5%, leaving the main rate at 0%. It also introduced a further round of quantitative easing, with asset purchases of €20 billion per month from 1 November and lasting until the ECB starts raising interest rates.

The Australian Reserve Bank has cut its ‘cash rate‘ three times this year and it now stands at an historically low level of 0.75%. Analysts are predicting that it may be forced to introduce quantitative easing if lower interest rates fail to stimulate growth.

Japan continues with its programme of quantitative easing (QE) and other central banks are considering lowering interest rates and/or (further) QE.

But there are two key issues with looser monetary policy.

The first is whether it will be sufficient to provide the desired stimulus. With interest rates already at or near historic lows (although slightly above in the case of the USA), there is little scope for further reductions. QE may help, but without a rise in confidence, the main effect of the extra money may simply be a rise in the price of assets, such as property and shares. It may result in very little extra spending on consumption and investment – in other words, very little extra aggregate demand.

The second is the effect on inequality. By inflating asset prices, QE rewards asset owners. The wealthier people are, the more they will gain.

Many economists and commentators are thus calling for the looser monetary policy to be backed up by expansionary fiscal policy. The boost to aggregate demand, they argue, should come from higher public spending, with governments able to borrow at very low interest rates because of the loose monetary policy. Targeted spending on infrastructure would have a supply-side benefit as well as a demand-side one.


ECB Press Conference


  1. Explain what is meant by quantitative easing.
  2. What determines the effectiveness of quantitative easing?
  3. Why is President Trump keen for the Federal Reserve to pursue more aggressive interest rate cuts?
  4. What is the Bank of England’s current attitude towards changing interest rates and/or further quantitative easing?
  5. What are the current advantages and disadvantages of governments pursuing a more expansionary fiscal policy?
  6. Compare the relative merits of quantitative easing through asset purchases and the use of ‘helicopter money’.










Selected data Board of Governors of the Federal Reserve System


  1. Distinguish between active and passive QT.















ECB publications

Previous blog posts


