The Federal Reserve’s decision to enter the New Year by extending and enlarging its policy of quantitative easing is another step toward “helicopter money”-that is, directly increasing the public’s cash balances by an injection of high-powered money. This could be done by dropping money from helicopters or by having the U.S. Treasury print checks while the Fed printed money. The idea is to use the printing press to stimulate the economy by directly injecting new money into the spending stream without relying on lower interest rates and the financial system.
So far the Fed has resisted the temptation to turn to helicopter money. But in entering its fourth round of quantitative easing (QE4), the Fed will buy $85 billion worth of mortgage backed securities and longer-term Treasuries per month until expected inflation reaches 2.5 percent, or unemployment falls to 6.5 percent. The Fed’s macroeconomic models predict those thresholds won’t be reached until mid-2015.
With the end of Operation Twist, the Fed has largely depleted its stock of short-term Treasuries. Under that program, the Fed bought $40 billion worth of longer-term Treasuries per month but sterilized those purchases by selling an equal amount of short-term bills. QE4 will add more than $1 trillion to base money in 2013 because none of the outright purchases of MBS ($40 billion per month) and Treasury securities ($45 billion per month) will be sterilized. Consequently, the Fed’s balance sheet will expand to more than $4 trillion by 2014 from less than $1 trillion prior to the 2008-09 financial crisis.