What Is Easy Money?

Easy money, in academic terms, denotes a condition in the money supply and monetary policy where the U.S. 澳洲幸运5官方开奖结果体彩网:Federal Reserve (Fed) allows cash to build up within the banking system. This lowers interest rates and makes🧔 it easier for banks and lenders to loan money to the population.

Easy money is also known as 澳洲幸运5官方开奖结果体彩网:cheap money, loose mo🍌netary policy, and🌞 expansionary monetary policy.

Understanding Easy Money

Easy money occurs when a 澳洲幸运5官方开奖结果体彩网:central bank wants to make money flow between banks more easily. When banks have access to more money, the 澳洲幸运5官方开奖结果体彩网:interest rates charged to customers go down because banks have more money than neede𝓀d to invest. 

The Fed typically lowers interest rates and eases monetary policy when it wants to stimulate the economy and lower the unemployment rate. The value of stocks will often rise initially during periods of easy money—when money is less expensive. But if this trend continues long enough stock prices may suffer due to 澳洲幸运5官方开奖结果体彩网:inflation fears.

The Fed weighs any decisions to raise or lower interest rates based on inflation. 𒆙If an easy monetary policy looks to be causing a rise in inflation, banks might keep interest rates higher to compensate for the increased costs for goods and services. 

On the flip side, borrowers might be willing to pay higher interest rates because inflation reduces a currency’s value. A dollar does not buy as much during periods of rising inflation, so the lender may not reap as much profit compared with when inflation is reꦺlatively low.

Easy Money Tools and Methods

The biggest policy tool to spark easy money is to lower interest rates, making borrowing less costly. Another easy monetary policy may lead to lowering the 澳洲幸运5官方开奖结果体彩网:reserve ratio for banks. This means banks have to keep less of their assets in cash—which leads to more money becoming available for borrowers. Because more cash is available to lend, interest rates are pushed lower. Easy money has a ♓cascade effect that starts at the Fed and goes down to consumers.

During an easing of monetary policy, the Fed may instruct the 澳洲幸运5官方开奖结果体彩网:Federal Open Market Committee (FOMC) to purchase Treasury-backed securities on the open market (known as 澳洲幸运5官方开奖结果体彩网:open market operations, or OMO). The purchase of these securities gives money to the people who sold them on th✱e open market. The sellers then have more money to invest.

Banks can invest excess money in a number of ways. Lenders earn money🐭 on the interest charged for money lent. Borrowers spend the loans on whatever they choose, which stimulates other economic activities. The process continu💟es indefinitely until the Fed decides to tighten monetary policy.

Easy vs. Tight Monetary Policy

Easy money and the policy measures that help make money easier to borrow can be contrasted with 澳洲幸运5官方开奖结果体彩网:tight monetary policy, which leads to "澳洲幸运5官方开奖结果体彩网:dear money"—or money that is expensive to borrow or hard to come by. Tightening monetary policy is often done in response to an overheating economy, characterized by high inflation, low unemployment, and high GDP growt💫h.

Tools and methods for enacting tight, or contractionary, policy are effectively the opposite of easy or loose policy measures. These include raising interest rates, selling s🃏ecurities in the open market (thus removing money from circulation), and raising the reserve requirements for banks.

Advantages and Disadvantages of Easy Money

While easy money is used to stimulate the economy and make borrowing less costly, too much easy money can lead to an overheated economy and rampant inflation. In fact, the central bank's job is to turn off the easy money spigot once an economic recovery has gained traction and price levels begin to rise.

Example of Easy Money: The Great Recession

Easy money has been a facet of the economies of much of the developed world since the 2008-09 financial crisis and 澳洲幸运5官方开奖结果体彩网:the Great Recession that followed. At the height of the crisis, stock markets crashed, une♓mployment soared, bankrupt🐓cies increased, and several large financial institutions failed.

During that period, the Fed along with many other central banks around the world scrambled cut interest rates to effectively zero, cut banks' reserve requirements to effectively zero, and pumped money into the economy via open market operations and 澳洲幸运5官方开奖结果体彩网:quantitative easing (QE).

Many economists agree that the scope and duration of the Great Recession, while among the deepest on r♕ecord, was greatly 🌜reduced as a result of these easy money efforts.

Frequently Asked Questions

What Is a Short-Term Effect of an Easy Money Policဣy?

While there is often a time lag between a new monetary policy measure and its effects on the economy, one short-term effect is lower interest rates, making loans cheaper for borrowers. As borrowers take advantage of these lower rates, they consume more and purchas♛e large assets like homes more readily. The longer-term eff❀ect of this increased consumption is a rise in corporate profits and economic growth.

What Tools Does the Fed Use to 𒅌Create an Easy Money Policy?

The Fed and other central banks have seveꦅral tools at their disposal to promote easy money. These include lowering interest rates, lowering the reserve requirement for banks, opening the discount window, purchasing assets through open market operations (OMO), and quantitative easing (QE) measures.

What Is Quantitative Easing?

Also known as QE, quantitative easing allows central banks to increase the money supply by growing their balance sheets through the purchase of different types of assets than they normally would via OMO. These might inℱclude longer-dated Treasuries, non-Treasury debt, equities, or alternative assets like mortgage-backed securities (MBS).

How Do Easy Money Policies Affect Investors?

Stock markets tend to rise when there is easy money, as yields for depositors and other savers fall, they may seek yield elsewhere in the markets. Easy money also helps boost most firms' profits and allows them to borrow and invest more cheaply. (One exception, however, is the financial sector, which often benefits from rising interest rates instead since they make loans.) In addition, bond prices tend to rise as rates fall, benefitting fixed-income investors.