In a normal economy, the Federal Reserve would use its’ control of interest rates to heat up a cooling economy or cool down a overheating economy. That helps even out the highs and lows or boom/bust type economy.
This is just one of several tools the FED has to help/moderate money. The cost of borrowing money has much to do with growth. Presently we enjoy historically low interest rates, yet, we still do not have enough economic growth that creates jobs faster than new folks entering the workforce.
The problem here has been the liquidity of the Banks. Meaning that the actual money they have to lend to a business to make a venture or expansion is limited.
One of its’ other tools is Quantitative Easing. this a process where the Federal Reserve buys equities, houses, corporate bonds or other assets from banks. The Banks find their funding position improved (liquid) and that makes them more willing to lend. This funds business expansion in the economy and promotes job growth. This can have a impact on inflation if it is not done with concise timing and at precise levels. It is also a good way of avoiding deflation.
The Central Bank of the Federal Reserve can also reverse this process if liquidity is to high and overheating the economy through a process called REPO. This pulls back assets to the central bank, lowering liquidity and reduces inflation.
Translate this into our modern day slow economic growth and the Fed will probably get it job done and in early spring, we should see some improvements in the employment picture. This would be the 3rd round of easing the Fed has done since the great recession started.
Seeing that Bernanke has done a very good job at not overstepping his stimulus, I have full faith he will do an very good job this go around. While all of this seems easy just to talk about, it would be very hard to get it right or kind of like walking a vibrating tight rope. Because as Ben makes his moves, the economy is moving around at his feet.
This could weaken the Dollar to other currencies but just a little lower would be a plus for US exports and perhaps making imports more expensive and creating a demand for US products for US consumption.
In any case, if we do not create more jobs/taxpayers, we will be doomed to make cuts in the budget that surely will have a negative effect on the economy. Hence the Feds’ willingness to do the hard and risky.