The central bank of the United States has the ultimate power to save the American economy during the time of this financial crisis. The Federal Reserve can create money by just ‘printing’ it and injecting it into the commercial banking system.
Does US ‘print’ Money To Save Economy?
The Federal Reserve is projected to have purchased $3.5 trillion by using government securities with these newly created dollars by the end of this year. According to Oxford economics, it is done to save the American economy from this pandemic crisis.
Fed’s goal through ‘printing’ money
The goal of the Federal Reserve through this money ‘printing’ is to keep markets alive and functioning after they had seized up in fear. These strategies also help to obtain credits easier with a bigger money supply and lower interest rates. Experts opinioned that without making this strategy possible and through other emergency measures of the Fed, the US economy would have crashed already. Fed Chair Jerome Powell said at a recent news conference that these purchases have helped market conditions improve substantially in recent weeks. But an unstated, practical result of the Fed’s bond purchases is that it creates money to finance the gigantic debt run up by Congress. This idea exploded those who say dollars should come from work, savings, and investment. The federal government’s bank isn’t just creating massive amounts of dollars from scratch. The government is also using those newly created dollars to pay down its own debt. This is due to the massive shutdown of the economy triggered by the pandemic.
How to inject money into the economy?
Printing money is not the job of the Federal Reserve. That’s the job of the U.S. Treasury, which also collects taxes and issues debt at the direction of Congress. In this pandemic crisis, the Fed instead makes large asset purchases on the open market by adding newly created electronic dollars to the reserves of banks such as Wells Fargo, Goldman Sachs, and Morgan Stanley. In exchange, the Fed receives large amounts of bonds, US treasury securities and agency securities that are backed by bundles of home mortgages. As a result, the markets start to function again. Apart from that, banks will get more dollars and can lend more money without worrying about exhausting their funds. This strategy also effectively increases the money supply and decreases interest rates. If the Fed didn’t take emergency measures like these, the whole economic system will blow up.
Does ‘printing’ money lead to inflation?
But experts say that printing such a huge amount of money may lead to inflation and a big disaster. This decreases the purchasing power of the dollar. The current crisis is due to the pandemic which makes businesses and markets shut down for weeks and months. This leads both the Fed and Congress to take such an extraordinary strategy. Congress has to approve huge funds for relief while the Fed is creating huge amounts of dollars that end up paying for that debt. Just like increasing the supply of money, the Fed can decrease it by increasing the interest rates. But if the interest on debts exceeds the economic growth, it makes a big disaster. The Fed claims that they have the tools which help to keep long-term interest rates below the economy’s growth rate.