When the Open Market Committee of the Federal Reserve met earlier this week, it decided to continue its third round of quantitative easing, known as QE3, until at least its next meeting in six weeks.

Quantitative easing is a technique of monetary policy where a central bank, in our case the Federal Reserve, will purchase financial assets for freshly “printed” money, thereby increasing the money supply and stimulating the economy. The basic idea is this: all macroeconomic slow downs, recessions and depressions included, are ultimately caused by a reduction in the overall spending by economic actors. This reduction is aggregate spending has a multiplier effect, because my spending is someone else’s income, which ripples across the economy and causes a bigger drop in gross domestic product than the actual reduction in spending. (For a more detailed discussion of the multiplier effect, you can read my earlier SLACE post about the shutdown and its economic effects.) With more money in circulation, economic actors can build up savings in weaker economic times and yet still have enough money left over to go and spend at their old levels. Of course, this can lead to inflationary pressures, with too many dollars chasing too few goods, so the Open Market Committee has to walk a fine line.

QE3 is already the the largest round of quantitative easing since the 2007-2008 recession, and it is on pace to be the largest round of quantitative easing ever. Critics of quantitative easing policies are asking the legitimate question of whether we will see a crash of asset prices, in particular in the stock and real estate markets, after the Fed decides to scale back QE3 since it has been pumping $85 billion into the economy every month since last fall. However, with GDP growth still relatively anemic and no signs of inflation on the horizon, most Fed watchers predict the Open Market Committee won’t begin scaling back until sometime well into 2014, at the earliest.

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