In the middle of the 2008-2009 financial crisis, the Fed cut interest rates practically to 0% in a bid to stimulate the economy. But even with these ultra-low rates, there's still too much unemployment. So how does the Fed keep stimulating if it can't cut interest rates further? The Fed buys a lot of long-term US Treasuries and Mortgage-backed securities to cut borrowing costs and pump cash into the system. The Fed buys these assets with money it creates out of thin air, which it can do because it's the Fed.Let’s try to help Joe out here – first by noting that there are different interest rates involved. Private borrowers do not get to borrow at the same interest rate as the government so even though Treasury bill interest rates are zero, the interest rate for private borrowers carries a credit spread. Hat tip to Brad DeLong for a recent explanation of how Quantitative Easing can change this credit spread. Brad also notes what the Federal Reserve did with its “Quantitative Easing”:
When the Federal Reserve undertakes quantitative easing, it enters the market and takes some risk off the table, buying up some of the risky assets issued by the U.S. government and its tame mortgage GSEs and selling safe assets in exchange.Brad is describing asset trades, which was not the same thing as creating money “out of thin air”.