Unemployment is too high, inflation is too low, and we're ready to open the monetary hoses again to flood a dry economy with more easy money. There, in a sentence, is the best summation I can manage of Fed Chair Ben Bernanke's big speech today.
For the first time, Bernanke made it clear that he is seriously considering a second round of "quantitative easing" to bring down interest rates and make it easier for families and companies to borrow money. The surest way to cure an economy of low inflation is to re-inflate with lower interest rates. Lower interest rates means cheaper access to capital, which means more capital, which means more investing and spending, which means more money chasing after goods and services, which means higher inflation.
But, short-term interest rates can't go any lower. They're already kissing the floor. So the Federal Reserve has to get creative if it wants to chase higher inflation. How the Fed does this -- for example, by buying U.S. debt or targeting higher inflation -- is important, and complicated, as my colleague Dan Indiviglio explains. But what does it mean for real people in the economy?
Let's say the Fed acts, and interest rates fall. This will make it cheaper for aspiring homeowners to buy or current homeowners to refinance. It will also make it easier for companies to borrow money to pay for new factories, new workers, and higher wages.