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QE2 Coming?

Today’s poor jobs report cements the fact that the recovery has stalled out and American workers are facing years, if not a decade, of sluggish wage growth and high unemployment. Therefore, there is new pressure for the Federal Reserve to try new measures to aid the recovery. The Washington Post’s Neil Irwin explains:

[T]here is now every reason to expect the Fed to announce new steps to try to bolster the economy at its policy meeting early next month.

Fed policy moves are never a done deal until they are announced, and there are lots of open questions around the exact approach the Fed will use to ease monetary policy further (though it will involve purchasing massive quantities of bonds). But with unemployment stuck at high levels and inflation coming in below the levels the Fed aims for, the train would seem to be leaving the station on new easing.

“Over the past five months, the private sector looks to have settled into a trend of weak job creation,” said J.P. Morgan Chase economist Michael Feroli. “if the mentality becomes entrenched that employment numbers like today’s are the norm, then an attitude of permanent malaise could enter into economic behavior. This is an outcome we believe the Fed would find unacceptable. For that reason, we see today’s employment report as only furthering the case for more asset purchase by the Fed.”

In central-bank lingo, such asset purchases are called “quantitative easing,” one of the methods monetary policymakers have to kick-start the economy when they cannot move interest rates any lower. The Federal Reserve prints new money, then purchases assets with it. Those asset purchases give cash to banks, and the hope is that banks then push that money out into the economy — lending it to businesses or homeowners, for instance. The Federal Reserve has already done a round of it, hence the phrase “QE2.”

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