How many times have you seen a box of detergent or a bottle of cold medicine that says something like "new and improved" or "more powerful than ever" and wondered whether the contents could live up to the hype on the label? Well, the Federal Reserve's third round of quantitative easing -- known as QE3 -- is all that and more. In fact, if rounds of quantitative easing had slogans, QE3's would be: "Wow! We've never tried anything this powerful before!"
Compared to QE1 and QE2, QE3 is unprecedented in its direction and scope. As such, it's making people across the board nervous, for one familiar reason: the possibility of inflation.
Boldly Going Where No Fed Chair Has Gone Before
Quantitative easing is when the Fed buys securities in the hope of driving down interest rates -- ideally spurring people and businesses to borrow more and spend more. In the case of QE3, the Fed has committed to buying $40 billion of mortgage-backed securities each month.
What makes QE3 different from QE1 or QE2 is that the Fed has put no limit on how long it will keep buying them. Chairman Ben Bernanke has simply said that the Fed will keep buying mortgage-backed securities until the U.S. labor market improves substantially.
As such, QE3 is an open-ended commitment from the Fed to virtually print money. This makes people nervous. And justifiably: Any time you inject massive amounts of money into a country's economy, you risk inflation.
What QE3 Means for You and Me
John Grgurich is a regular contributor to The Motley Fool.