By Scott Sumner
Ever since interest rates fell close to zero in late 2008, many pundits have expressed skepticism that Fed policy can stimulate the economy. And yet, if the Fed really is "out of ammunition," then why did stocks rise so sharply on the news of QE3? Fortunately the Fed still has plenty of ammunition. The recent policy initiative represents baby steps in the right direction, but the Fed still needs to do much more.

The Fed Isn't Done Yet
Once rates fall to zero, the Fed has two primary tools for impacting aggregate demand, or total spending in the economy. One tool is "quantitative easing" often dubbed QE, or "printing money." In fact, the recent policy is not quite the same as printing money, as most of the new injections are simply commercial bank reserves stored electronically at the Fed. And also because the Fed now pays interest on those reserves, whereas cash does not earn interest. With interest rates being relatively low on alternative investments, the banks are
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