What is quantitative easing?

This involves purchasing large-scale assets from banks beyond just Treasury bills and bonds. This effectively gives banks much more liquidity, with the hope that they will actively lend it out at cheaper rates and expand the economy. But quantitative easing runs the risk of sparking inflation.

The Fed took an aggressive approach to help the US economy during COVID-19 beyond standard monetary levers, including broad purchases of mortgage-backed securities, Treasury securities, and more.

This program injected trillions of dollars of new money into financial markets to stimulate the economy. The move catalyzed an 11-year bull run and was repeated during the pandemic. Experts argue such power could worsen wealth inequality and contribute to bubbles in housing and finance.

Interest rates, the cost of borrowing money, are the primary tool the Federal Reserve uses to control inflation. During periods of deflation, setting interest rates below zero penalizes saving, encourages banks to lend more and moves more cash through the economy.

The majority of money in circulation is credit, not cash. This credit, which acts similarly to direct deposit from employers, is added to bank accounts by the Federal Reserve. The Fed also employs tools like the federal funds rate and open market operations to expand or contract credit.

That includes all of the physical and electronic money in circulation. It tracks not only US coins and bills, but also the money that moves through bank deposits. The Fed uses metrics called trackers to follow different types of transactions through the money supply.

While the details are not fully agreed upon, many economists point to the Federal Reserve's tightening of the money supply as a prime culprit, leading to a significant deflationary spiral.

Recessions can last anywhere from months to years. To encourage economic growth, governments use policy levers such as lowering interest rates or introducing a stimulus. Economists credit massive stimulus funds for helping the economy quickly recover from a recession during the COVID-19 pandemic.

Repurchasing agreements are short-term trade agreements in which a dealer sells securities and agrees to repurchase them at a higher price soon after (often within 1 to 2 days). This gives dealers quick access to cash and allows the purchasing party, often the Federal Reserve, to control liquidity in securities. This can be used to alter the money supply, which is a key element in combating deflation.

This tends to make products and services more affordable and normalizes the standard of living. Bad deflation usually happens when there are sudden changes to either supply or demand. Near-zero interest rates helped create the real estate bubble that sparked the Great Recession when it crashed Because deflation distorts the value of money, deflation is particularly harmful for borrowers. Low interest rates made it easy for businesses and everyday people to take on enormous debt, which exacerbated the effects of the recession.

Car loans, mortgages, business investments—these and more can be drastically impacted by the adjustment of the Federal Reserve’s federal funds rate. Alternatively, savers can earn higher, low-risk yields on their savings when the Fed’s target rate is higher.

Deflationary periods are characterized by broad, significant price declines. The Federal Reserve can monitor deflation by tracking prices through price indexes, such as the Consumer Price Index (CPI), which characterizes the average costs for consumers each month.

The money supply tracks how much cash, as well as electronic funds like savings accounts, is circulating through the economy. And a downward turn can be a bad sign.

A central bank itself does not mean significant inflation will occur, but economists generally point to factors like two world wars and the printing of money to finance the US federal deficit as primary drivers of price increases.

Modern Monetary Theory is a macroeconomic theory that says government spending should not be restrained by fears of rising debt. Here's a breakdown of how the theory works.

The stock market crash of 1929 helped trigger a period of deflation in the United States by creating a drastic decrease in the total money supply. Because of the United States' central role in the world economy, virtually every single country was impacted by the recession.

It’s an arbitrary number originating from an offhand comment made by a New Zealand policymaker. The real objective is to maintain predictable prices for businesses and families to plan around while avoiding the dangers of deflation.

That psychological aspect is referred to as "the deflationary spiral." When prices start decreasing, people tend to hold on to their money to pay the lowest prices. But as prices start stabilizing, people resist increasing prices.

When the Federal Reserve began raising interest rates in 2022 to combat inflation, interest payments borrowers owed to private credit lenders increased accordingly. Private credit funds benefited as loan returns increased, making the asset class attractive to investors at the time.

Sustained periods of inflation are often caused by central bank policies including low interest rates or increased money supply. With more money chasing the same number of goods and services, prices tend to rise and the value of a single dollar drops.

When short sellers realize their positions may be incorrect—usually triggered by increasing share prices—they often try to quickly buy back their shares in order to minimize their total losses. When this happens on a large scale, that buying activity can drastically increase to represent the seemingly high demand for that stock. The result is called a "short squeeze," which refers to short sellers literally being squeezed out of their positions by rising prices.

When it was first created in the 1910s, the Federal Reserve System became a crucial link between the nation's regional banks. The increasing number of checks used by the thousands of banks across the nation required a central operator, and the Fed was uniquely positioned to help. Learn more about the role the Fed played in the history of checks.

Because it’s viewed as a risk-free platform to earn interest, whatever rate it sets becomes the default benchmark. To maintain its target rate prescribed by the Federal Open Market Committee, the Fed has various tools it offers both commercial banks and home loan institutions.

The traditional view of banking is that customers deposit money into the bank and the bank lends out those deposits. That's partly true, but most banks work by making loans first, which creates an asset on their balance sheet as a corresponding deposit. Banks often operate under a money multiplier ratio, lending out several times their total reserves.

Known as "Regulation Q," the act sought to stop bank competition for customers involving increasing interest rates in the 1930s. This competition led banks to make reckless investment decisions to pay higher interest rates. During the ban, banks competed by focusing on convenience (ATMs, branches), relying on fees, and building relationships.

It's based on federal fund futures contract prices. At a Fed meeting in July 2024, for instance, Chair Jerome Powell once again decided not to lower rates, though he said cuts could be on the table in September.

The end of World War II ended Japan's isolation in the global economy, prompting what's now called the "Japanese Economic Miracle." From the 1940s to the 1980s, Japanese policy makers enacted ultra-loose monetary policies that pushed a ton of cash into the market and fueled rapid growth. But these policies ultimately helped create a bubble and sent the country into a deep period of deflation.

The Federal Reserve Economic Data, or FRED, tracks monthly “housing starts,” the number of new residential construction projects being built. Some argue this data can serve as an economic barometer.

Disinflation happens when prices are still going up, just at a slower rate. Prolonged disinflation is also often accompanied by a recession, making it painful for consumers.

After the US reached its debt ceiling in January 2023, the Treasury deployed "extraordinary measures" to keep paying obligations. This article explains the steps, how they work, and why they last only for a limited time.

This reduces the number of shares on the market and, therefore, makes the remaining shares more valuable. Buybacks have received a lot of criticism in recent years for many reasons, such as how they could artificially inflate share prices.

Although Fed governors have largely practiced some version of a blackout period before Federal Open Market Committee meetings where the board decides where interest rates should be since the 1980s, the official blackout period wasn't formalized until 2011. During the blackout, members of the Federal Reserve generally aren't allowed to speak publicly on macroeconomic or monetary policy in order to avoid any confusion over the board's decisions.

After a series of economic panics induced by a lack of reserve cash at regional banks, the architects of today’s Federal Reserve opted to emphasize the goal of the bank as a reserve at the federal level—thus creating the lasting name.

Cash in the US is the result of a collaborative process between the Federal Reserve, the Treasury Department, regional banks, and a little-known agency called the Bureau of Engraving and Printing. From design to issuance, learn the steps in currency production in the US with this smart, aesthetic interactive.

The federal funds rate is the interest rate at which banks lend their excess funds through the Fed. This influences what banks are willing to pay consumers for their deposits in savings and CD accounts. Typically, the higher the federal funds rate, the higher the interest rates on CDs.

Keep seeing inflation in the news, but don't have a great grasp on what it means or how it works? This overview from 1440 breaks down how economists think about inflation, what it means for the average consumer, and how governments attempt to keep rising prices in check through various policies.