The document discusses the effects of the Federal Reserve's quantitative easing programs (QE1, QE2, QE3) on the US economy. QE1 helped stop the recession but did not stimulate much growth as banks held excess reserves. QE2 and QE3 aimed to increase inflation and lower bond yields. While economic growth increased, the programs' long-term effects are still uncertain and inflation remains below targets. The author believes QE will further boost the economy but its sustained success is not yet clear.
Our October 2010 Newsletter is now available. The Newsletter Article, “Can The Fed Boost The Economy?” discusses the four things that Fed Chair Bernanke said that the Fed could do to boost the economy. The article explains how each of the 4 options he proposed would affect your company’s future. Our second article, “In Case You Didn’t Notice, The Recession Ended In June 2009?” addresses the real meaning of the recessionary slide ending before the stimulus had any impact and what it will take for the economy to have a strong recovery. Our final article, “Is The Real Employment Picture Still Deteriorating?” talks about the negative meaning of last Friday’s Labor Department unemployment report and its long term implications.
World Currencies
Currently most—if not all—currencies are directly pegged to the US dollar with the
governance of a monetary standard. The variance in the effects of inflationary pressure—when
compared to the US dollar—is due to their value (purchasing power) and their central banks'
monetary policies. Today we have reports concerning the rise in value of various currencies
when compared to the US dollar. For the most part, this is due to the US dollar's rate of descent
due to its central bank's failure to raise the Fed Fund rate which would give some balance to its
devilish inflationary monetary policy.
Our October 2010 Newsletter is now available. The Newsletter Article, “Can The Fed Boost The Economy?” discusses the four things that Fed Chair Bernanke said that the Fed could do to boost the economy. The article explains how each of the 4 options he proposed would affect your company’s future. Our second article, “In Case You Didn’t Notice, The Recession Ended In June 2009?” addresses the real meaning of the recessionary slide ending before the stimulus had any impact and what it will take for the economy to have a strong recovery. Our final article, “Is The Real Employment Picture Still Deteriorating?” talks about the negative meaning of last Friday’s Labor Department unemployment report and its long term implications.
World Currencies
Currently most—if not all—currencies are directly pegged to the US dollar with the
governance of a monetary standard. The variance in the effects of inflationary pressure—when
compared to the US dollar—is due to their value (purchasing power) and their central banks'
monetary policies. Today we have reports concerning the rise in value of various currencies
when compared to the US dollar. For the most part, this is due to the US dollar's rate of descent
due to its central bank's failure to raise the Fed Fund rate which would give some balance to its
devilish inflationary monetary policy.
The presentation includes the basic idea of what Monetary policy is and how many central banks around the world uses it to recover out of recession of 2008.
Trekking markets & more with InvestrekkInves Trekk
The report presents a summary of the Indian market activity during the week ended 27 June 2021. It also provides some important insights about the global market trends and Indian Market outlook for the Week beginning 28 June 2021.
Lately, there's been a lot of focus on the Fed and the potential for tapering. In today's Topic Talks, NEPC's Jennifer Appel breaks down the Federal Reserve's toolbox, the basics of quantitative easing, how tapering works, and what it could mean for capital markets.
A summary of Quantitative easing policy, its first implementation in Japan, then America after the crisis of 2008 and Europe after the Greece sovereign debt crisis.
Agcapita July 2013 - Central Banking's Scylla and CharybdisVeripath Partners
While I believe that eliminating QE is the right thing to do for the long-term health of the economy, the recent equity and bond market declines are but modest harbingers of the unintended short-term consequences that the Fed’s prolonged ZIRP/QE program and its termination will wreak – rollover and convexity risk. These are the proverbial pigeons that will come home to roost if the US Federal Reserve stops its massive bond-buying spree and rates normalize.
Global bond markets fell in May and June, as investors contemplated the end of massive liquidity from the U.S. Federal Reserve’s bond-buying program. The fund’s overweight exposure to the strengthening U.S. dollar aided performance during the quarter, as did our holdings of commercial mortgage-backed securities. Our mortgage credit holdings and our allocation to high-yield bonds generated positive returns early in the period before investors began to shed risk in May, but the positions remained positive overall for the quarter. We have a generally positive outlook for global economic growth and are seeking to capitalize on opportunities in spread sectors exhibiting improved relative value.
What does it mean to be a reserve currency? How did the U.S. dollar achieve reserve status? And what does the "exorbitant privilege" mean for the U.S.? NEPC's Jennifer Appel, CFA breaks it down in today's Topic Talks.
The Hitchhiker's Guide to Yellen's Speech
We spent all week waiting anxiously to see what Our Glorious Leader would say only to get a confused mash-up of central bank water-cooler conversation.
If you want to know what she really said - and, more importantly, didn't say - you might like to read this translation.
What recent and past actions have Canada and the US taken to counter.pdfmeejuhaszjasmynspe52
What recent and past actions have Canada and the US taken to counteract their exchange rates
with the economy in such distress over the past 10 years?
Solution
Since 2007, the world has experienced a period of severe financial stress, not seen since the time
of the Great Depression. This crisis started with the collapse of the subprime residential
mortgage market in the United States and spread to the rest of the world through exposure to
U.S. real estate assets, often in the form of complex financial derivatives, and a collapse in global
trade. Many countries were significantly affected by these adverse shocks, causing systemic
banking crises in a number of countries, despite extraordinary policy interventions. Systemic
banking crises are disruptive events not only to financial systems but to the economy as a whole.
Such crises are not specific to the recent past or specific countries – almost no country has
avoided the experience and some have had multiple banking crises. While the banking crises of
the past have differed in terms of underlying causes, triggers, and economic impact, they share
many commonalities. Banking crises are often preceded by prolonged periods of high credit
growth and are often associated with large imbalances in the balance sheets of the private sector,
such as maturity mismatches or exchange rate risk, that ultimately translate into credit risk for
the banking sector.
Crisis management starts with the containment of liquidity pressures through liquidity support,
guarantees on bank liabilities, deposit freezes, or bank holidays. This containment phase is
followed by a resolution phase during which typically a broad range of measures (such as capital
injections, asset purchases, and guarantees) are taken to restructure banks and reignite economic
growth. It is intrinsically difficult to compare the success of crisis resolution policies given
differences across countries and time in the size of the initial shock to the financial system, the
size of the financial system, the quality of institutions, and the intensity and scope of policy
interventions. With this caveat we now compare policy responses during the recent crisis episode
with those of the past. The policy responses during the 2007-2009 crises episodes were broadly
similar to those used in the past. First, liquidity pressures were contained through liquidity
support and guarantees on bank liabilities. Like the crises of the past, during which bank
holidays and deposit freezes have rarely been used as containment policies, we have no records
of the use of bank holidays during the recent wave of crises, while a deposit freeze was used only
in the case of Latvia for deposits in Parex Bank. On the resolution side, a wide array of
instruments was used this time, including asset purchases, asset guarantees, and equity injections.
All these measures have been used in the past, but this time around they seem to have been put in
place quicker (for detailed informatio.
INTERNATIONAL MONETARY FUND
Abstract
The U.S. financial and economic crisis has had severe global repercussions. The run-up to the crisis involved a substantial and widespread underestimation of risks—especially in housing—and growing leverage and liquidity mismatches, in particular through off-balance-sheet vehicles and non-bank entities in less-regulated areas. Against a backdrop of easy global financial conditions, this dynamic fed an unsustainable buildup of financial imbalances, above all in housing markets. The sharp decline in housing prices that started in 2007 weakened several systemically important financial institutions, culminating in the collapse of Lehman Brothers, and revealing major weaknesses in the U.S. regulatory and resolution frameworks. This was followed by the worst global financial panic since the Great Depression, with extreme strains in a broad range of markets, volatility in capital flows and exchange rates, and a cascade of systemic events. Economic activity collapsed globally, with trade contracting sharply and advanced economies as a group registering the steepest decline in production in the postwar period. Emerging markets economies also experienced intense pressure, amid retrenching trade and tighter international financing conditions.
I. Overview ; Outlook and Risks
1. Recent data suggest that the sharp fall in output may now be ending, although economic activity remains weak. Economic indicators point to a decelerating rate of deterioration, particularly in labor and housing markets, both of which are key to economic recovery and financial stability. In tandem, financial conditions have noticeably improved, with narrowing interest-rate spreads and growing confidence in financial stability in the wake of measures deployed by the Administration, the Federal Deposit Insurance Corporation (FDIC), and the Federal Reserve. That said, both financial and economic indicators remain at stressed or weak levels by historical standards.
2. 4. The staff's outlook remains for a gradual recovery, consistent with past international experience of financial and housing market crises. The combination of financial strains and ongoing adjustments in the housing and labor markets is expected to restrain growth for some time, with a solid recovery projected to emerge only in mid-2010. Against this background, GDP is expected to contract by 2½ percent in 2009, followed by a modest ¾ percent expansion in 2010 on a year-average basis (on a Q4-over-Q4 basis, -1 ½ percent in 2009 and 1 ¾ percent in 2010). Meanwhile, growing economic slack—with unemployment peaking at close to 10 percent in 2010—would push core inflation to very low levels, with the headline CPI expected to decrease by ½ percent in 2009 and increase by 1 percent in 2010. rates, on concerns about fiscal sustainability; and rising corporate distress. Much will also depend on developments abroad, including progress made in strengthening financial institutions and markets.
II. Near-term stabilization
1. Macroeconomic policies are providing welcome support to demand. The fiscal stimulus—well targeted, timely, diversified, and sizeable—is projected to boost annual GDP growth by 1 percent in 2009 and ¼ percent in 2010. This is being appropriately complemented by a highly expansionary monetary stance and “credit easing” measures that are also relieving financial strains. Continued clear communication on the near-term outlook will be essential to anchor inflation expectations, given the prevailing uncertainty. If activity proves weaker than expected, the Fed could undertake additional credit easing, and further strengthen its commitment to maintain a highly accommodative stance. If necessary, additional fiscal stimulus could also be considered, focused on fast-acting measures, although this would need to be complemented by a concomitantly stronger medium-term adjustment.
2. Steps to s
The presentation includes the basic idea of what Monetary policy is and how many central banks around the world uses it to recover out of recession of 2008.
Trekking markets & more with InvestrekkInves Trekk
The report presents a summary of the Indian market activity during the week ended 27 June 2021. It also provides some important insights about the global market trends and Indian Market outlook for the Week beginning 28 June 2021.
Lately, there's been a lot of focus on the Fed and the potential for tapering. In today's Topic Talks, NEPC's Jennifer Appel breaks down the Federal Reserve's toolbox, the basics of quantitative easing, how tapering works, and what it could mean for capital markets.
A summary of Quantitative easing policy, its first implementation in Japan, then America after the crisis of 2008 and Europe after the Greece sovereign debt crisis.
Agcapita July 2013 - Central Banking's Scylla and CharybdisVeripath Partners
While I believe that eliminating QE is the right thing to do for the long-term health of the economy, the recent equity and bond market declines are but modest harbingers of the unintended short-term consequences that the Fed’s prolonged ZIRP/QE program and its termination will wreak – rollover and convexity risk. These are the proverbial pigeons that will come home to roost if the US Federal Reserve stops its massive bond-buying spree and rates normalize.
Global bond markets fell in May and June, as investors contemplated the end of massive liquidity from the U.S. Federal Reserve’s bond-buying program. The fund’s overweight exposure to the strengthening U.S. dollar aided performance during the quarter, as did our holdings of commercial mortgage-backed securities. Our mortgage credit holdings and our allocation to high-yield bonds generated positive returns early in the period before investors began to shed risk in May, but the positions remained positive overall for the quarter. We have a generally positive outlook for global economic growth and are seeking to capitalize on opportunities in spread sectors exhibiting improved relative value.
What does it mean to be a reserve currency? How did the U.S. dollar achieve reserve status? And what does the "exorbitant privilege" mean for the U.S.? NEPC's Jennifer Appel, CFA breaks it down in today's Topic Talks.
The Hitchhiker's Guide to Yellen's Speech
We spent all week waiting anxiously to see what Our Glorious Leader would say only to get a confused mash-up of central bank water-cooler conversation.
If you want to know what she really said - and, more importantly, didn't say - you might like to read this translation.
What recent and past actions have Canada and the US taken to counter.pdfmeejuhaszjasmynspe52
What recent and past actions have Canada and the US taken to counteract their exchange rates
with the economy in such distress over the past 10 years?
Solution
Since 2007, the world has experienced a period of severe financial stress, not seen since the time
of the Great Depression. This crisis started with the collapse of the subprime residential
mortgage market in the United States and spread to the rest of the world through exposure to
U.S. real estate assets, often in the form of complex financial derivatives, and a collapse in global
trade. Many countries were significantly affected by these adverse shocks, causing systemic
banking crises in a number of countries, despite extraordinary policy interventions. Systemic
banking crises are disruptive events not only to financial systems but to the economy as a whole.
Such crises are not specific to the recent past or specific countries – almost no country has
avoided the experience and some have had multiple banking crises. While the banking crises of
the past have differed in terms of underlying causes, triggers, and economic impact, they share
many commonalities. Banking crises are often preceded by prolonged periods of high credit
growth and are often associated with large imbalances in the balance sheets of the private sector,
such as maturity mismatches or exchange rate risk, that ultimately translate into credit risk for
the banking sector.
Crisis management starts with the containment of liquidity pressures through liquidity support,
guarantees on bank liabilities, deposit freezes, or bank holidays. This containment phase is
followed by a resolution phase during which typically a broad range of measures (such as capital
injections, asset purchases, and guarantees) are taken to restructure banks and reignite economic
growth. It is intrinsically difficult to compare the success of crisis resolution policies given
differences across countries and time in the size of the initial shock to the financial system, the
size of the financial system, the quality of institutions, and the intensity and scope of policy
interventions. With this caveat we now compare policy responses during the recent crisis episode
with those of the past. The policy responses during the 2007-2009 crises episodes were broadly
similar to those used in the past. First, liquidity pressures were contained through liquidity
support and guarantees on bank liabilities. Like the crises of the past, during which bank
holidays and deposit freezes have rarely been used as containment policies, we have no records
of the use of bank holidays during the recent wave of crises, while a deposit freeze was used only
in the case of Latvia for deposits in Parex Bank. On the resolution side, a wide array of
instruments was used this time, including asset purchases, asset guarantees, and equity injections.
All these measures have been used in the past, but this time around they seem to have been put in
place quicker (for detailed informatio.
INTERNATIONAL MONETARY FUND
Abstract
The U.S. financial and economic crisis has had severe global repercussions. The run-up to the crisis involved a substantial and widespread underestimation of risks—especially in housing—and growing leverage and liquidity mismatches, in particular through off-balance-sheet vehicles and non-bank entities in less-regulated areas. Against a backdrop of easy global financial conditions, this dynamic fed an unsustainable buildup of financial imbalances, above all in housing markets. The sharp decline in housing prices that started in 2007 weakened several systemically important financial institutions, culminating in the collapse of Lehman Brothers, and revealing major weaknesses in the U.S. regulatory and resolution frameworks. This was followed by the worst global financial panic since the Great Depression, with extreme strains in a broad range of markets, volatility in capital flows and exchange rates, and a cascade of systemic events. Economic activity collapsed globally, with trade contracting sharply and advanced economies as a group registering the steepest decline in production in the postwar period. Emerging markets economies also experienced intense pressure, amid retrenching trade and tighter international financing conditions.
I. Overview ; Outlook and Risks
1. Recent data suggest that the sharp fall in output may now be ending, although economic activity remains weak. Economic indicators point to a decelerating rate of deterioration, particularly in labor and housing markets, both of which are key to economic recovery and financial stability. In tandem, financial conditions have noticeably improved, with narrowing interest-rate spreads and growing confidence in financial stability in the wake of measures deployed by the Administration, the Federal Deposit Insurance Corporation (FDIC), and the Federal Reserve. That said, both financial and economic indicators remain at stressed or weak levels by historical standards.
2. 4. The staff's outlook remains for a gradual recovery, consistent with past international experience of financial and housing market crises. The combination of financial strains and ongoing adjustments in the housing and labor markets is expected to restrain growth for some time, with a solid recovery projected to emerge only in mid-2010. Against this background, GDP is expected to contract by 2½ percent in 2009, followed by a modest ¾ percent expansion in 2010 on a year-average basis (on a Q4-over-Q4 basis, -1 ½ percent in 2009 and 1 ¾ percent in 2010). Meanwhile, growing economic slack—with unemployment peaking at close to 10 percent in 2010—would push core inflation to very low levels, with the headline CPI expected to decrease by ½ percent in 2009 and increase by 1 percent in 2010. rates, on concerns about fiscal sustainability; and rising corporate distress. Much will also depend on developments abroad, including progress made in strengthening financial institutions and markets.
II. Near-term stabilization
1. Macroeconomic policies are providing welcome support to demand. The fiscal stimulus—well targeted, timely, diversified, and sizeable—is projected to boost annual GDP growth by 1 percent in 2009 and ¼ percent in 2010. This is being appropriately complemented by a highly expansionary monetary stance and “credit easing” measures that are also relieving financial strains. Continued clear communication on the near-term outlook will be essential to anchor inflation expectations, given the prevailing uncertainty. If activity proves weaker than expected, the Fed could undertake additional credit easing, and further strengthen its commitment to maintain a highly accommodative stance. If necessary, additional fiscal stimulus could also be considered, focused on fast-acting measures, although this would need to be complemented by a concomitantly stronger medium-term adjustment.
2. Steps to s
31 August 2011--US Banking Sector Report 2011EconReport
The US dollar is falling in value as its debts increase, expenditures increase, and the
Federal Reserve so-called Quantitative Easing (QE) experiments only prove to further punish the
survivors of the so-called World Financial Crisis/Credit Crunch with the inability to preserve and
grow hard-won capital. The main cause of the dollars decline is the “blatant disrespect” of the
natural inverse relationship between the value and the interest-rate of bonds—which is a debt
issue—as all fiat bills are. Inflation began on 25 March 2009 when the US central bank decided
to “buy” at least US $100B worth of Treasury bonds.
Swedbank was founded in 1820, as Sweden’s first savings bank was established. Today, our heritage is visible in that we truly are a bank for each and every one and in that we still strive to contribute to a sustainable development of society and our environment. We are strongly committed to society as a whole and keen to help bring about a sustainable form of societal development. Our Swedish operations hold an ISO 14001 environmental certification, and environmental work is an integral part of our business activities.
But resolving this legacy issue with continued application of past interventionist instruments does not incentivize the much needed structural reforms and private capital market activities. Financial repression has induced a re-allocation of capital across markets and greatly enhanced the role of public markets at the detriment of private market activities. Artificially low – or in some cases even negative – interest rates break the credit intermediation channel which can crowd out viable private investors.
The Federal Reserve and Money SupplyTakes s.docxcherry686017
The Federal Reserve and Money Supply
*
Takes sections for chapters 10, 14, & 15 from the Mishkin text (9th edition), Federal Reserve reader, and www.federalreserve.gov
Chpt 10
3 key players
1. Depositors
2. Banks
3. Federal Reserve
Depositors are the most important providers of funds and they are the biggest users of fundsIf depositors lose confidence bank runs can occur, causing banks to lose their sources of funds If depositors have confidence banks have an increase amount of funds
Banks are the keepers of depositors funds
As before our deposits are their biggest liabilities, but their greatest assets
Balance Sheet is the most important document to understand the banking system
It is made up of two broad categories
Liabilities (Sources of Funds)
Assets (Uses of Funds)
Listed from most liquid to least liquid
Liabilities are simply the sources of funds
Checkable deposits
Payable on demand
Considered to be an asset for depositor (us)
Lowest cost of sources for banks we want easy access to liquidity
Only 6% of total liabilities (per the Fed)
Nontransaction deposits
CDs
Owners cannot write checks against such accounts
Primary source of bank funds (53% of bank liabilities)
Checkable deposits intterest paid on deposits has accounted for 25% of total bank operating expenses while the costs involved in servicing accounts (employee salaries, building, rent) has roughly 50% of operating expenses!
Liabilities Cont.
Discount Loans / Fed Fund (31% of liabilities)
Discount loans are loans from the Federal Reserve (also known as advances)
Typically 1%-pt above the fed funds rate
Banks typically do not want to borrow from the Fed unless absolutely necessary!
Fed Funds loan (overnight loans)
Federal funds are overnight borrowings by banks to maintain their bank reserves at the Federal Reserve
Transactions in the federal funds market allow banks with excess reserve balances to lend reserves to banks with deficient reserves
These loans are usually made for one day only (‘overnight’).
Bank Capital (10% of liabilities)
Banks keep reserves at Federal Reserve Banks to meet their reserve requirements and to clear financial transactions.
Typically referred to as the uses of fundsThe interest payments earned on them are what enable banks to make profits.
Reserve Requirements
These are deposits plus currency that is physically held by banks.
Reserves are made up by required reserves and excess reserves
Required Reserves: For every dollar of checkable deposits at a bank (a fraction must be kept as reserves)
Excess Reserves: The most liquid of all bank assets and the bank can use them to make other loans to banks (through the fed funds market) or other loans.
Cash Items in Collection Process
Checks in process of being cleared from another bank
Correspondent banking
Common in small banks
Small banks hold deposits in larger banks in exchange for a variety of services, including check collection, foreign exchange tran ...
• Spread sectors continued to rally as investors focused more on opportunities than on risks.
• The Fed maintained its stance, but new questions emerged about how much further influence the central bank can exert.
• With tax rates fixed for the near term, policymakers turned their attention to spending cuts.
• Despite tighter valuations in corporate credit, we foresee continued solid demand and fundamentals.
Will bank loans increase, or decrease? Will this stop the recovery in its tracks. Fed at moment is "puchasing" $85 bn in assets from banking system as traditional monetray policy is in "liquidity trap".
1. Following the stock market crash in October 1987 and the terror.docxjeremylockett77
1. Following the stock market crash in October 1987 and the terrorist attack in September 2001 the Federal Reserve rapidly increased the amount of money in circulation and lowered interest rates. Why did the Federal Reserve take these actions and what impact do you believe they had?
2. From early 2005 through August 2006, the Federal Reserve steadily raised short term interest rates, being concerned about potential inflationary pressures. It then held short term rates steady through August 2007, saying that it remained very watchful about possible inflationary dangers. However in September 2007 it suddenly dropped rates and took other steps to aid capital market liquidity. Recently short term rates have been maintained at extremely low rates (effectively zero percent for a while). Now there are fears of a double-dip recession and potential deflation on one hand and other fears of potential high inflation in the foreseeable future. If you were sitting on the Open Market Committee today, how would you go about deciding what policy path to take, particularly given the lag in the effect of some monetary policies on the real economy?
Note on Money and Monetary Policy
Fiscal and monetary policy represent two fundamental tools of macroeconomics. In the 1930s, John Maynard Keynes focused attention on the power of countercyclical fiscal policy, an emphasis that dominated policy circles in the United States and elsewhere at least into the 1960s. Since then, however, policymakers in many countries have relied more heavily on monetary policy to manage the business cycle.
Changes in intellectual fashion and political calculation have driven this shift. Policymakers have learned that the legislative process is often too slow to allow for fiscal fine tuning, since the budget cannot always be adjusted fast enough in the face of rapidly changing economic circumstances. They have also discovered that fiscal policy suffers a systematic bias in favor of stimulus because national legislatures generally find it politically easier to run deficits than surpluses. Monetary policy, by contrast, may be less prone to such problems. Central banks can change policy relatively quickly in response to new conditions. Moreover, central banks are often insulated from domestic political pressures and so better able to impose economic restraint.
The Money Identity
In theory, monetary policy rests on a simple identity: economic output, measured in current dollars, equals the amount of money in circulation multiplied by how often that money changes hands. Economists will recognize this as
MxV=PxQ
in which M equals the money supply, V the velocity or turnover of money, P the price level, and Q the quantity of output. Each side of the identity equals nominal GDP; and Q, by itself, represents real GDP .
Like most identities, this one clarifies important relationships but also conceals difficult questions that require answers if it is to be used effectiv ...
1. Current Events #2
Dr. Jon Scott | Financial Markets and Institutions for Business
Kevin Vo & Ron Martin
Has the implementation of Quantitative Easing 1, 2, and 3 had the desired
effects on the U.S. economy?
Many central banks across the world, including the U.S. Federal Reserve, have a pivotal
role on managing and sustaining the health of the global economy, especially on economic
recovery from recessions. When the recession occurred in 2008, the central banks stepped in to
jumpstart the global economy by implementing numerous monetary policies, most notably
quantitative easing. Quantitative easing is the process when a central bank buys a large amount
of securities from commercial banks and other financial institutions to boost the money supply,
thus lowering the fed funds rate to stimulate lending and liquidity. In this case, the Federal
Reserve took on three rounds of quantitative easing in separate occasions: QE1, QE2, and QE3.
Each of these phases occurred when the central bank purchased a large sum of Treasury and
mortgaged-backed securities, accumulating over $4 trillion.1 The process of quantitative easing
can create a major impact on world economies, as well as the structures and operations of major
banks and financial institutions. In this case, QE1, QE2, and QE3 have yielded mixed results to
achieve the desired effects for the U.S. economy.
The first round of quantitative easing, or QE1, occurred in late November 2008 when the
Federal Reserve began purchasing $600 billion in mortgage-backed securities in response to the
subprime mortgage crisis. The process of QE1 lasted for almost two years, as the Federal
Reserve halted the process of quantitative easing in June 2010, accumulating to a total amount of
$2.1 trillion in debt securities on its balance sheet.2 Even though QE1 succeeded in stopping the
recession, it did not achieve much success on stimulating economic growth, as banks became
2. less likely to lend with lower rates. In response, the Federal Reserve began taking on QE2, the
second round of quantitative easing when the central bank purchased an additional $600 billion
of Treasury securities, spanning from November 2010 to June 2011.3 QE2 was implemented to
increase demand for borrowing to increase inflation and more importantly, to lower short-term
Treasury yields.4 And lastly, the Federal Reserve took on the final round of quantitative easing,
or QE3, at the start of September 2012. The initiative would enable the Federal Reserve to
purchase $40 billion worth of mortgage-backed securities per month, alleviating banks and
financial institutions from holding more toxic assets, usually consisting of subprime mortgages.5
So far, the process of quantitative easing has provided some beneficial effects such as increased
economic growth and liquidity in the U.S. However, there are still many drawbacks persisting
from the results of quantitative easing.
Even though the purpose of quantitative easing was to provide monetary accessibility and
liquidity to the public, most of the cash from the Federal Reserve is held in excess reserves by
major banks and financial institutions. When quantitative easing is applied, the process of
purchasing debt securities by the central bank caused the fed funds rates to be lowered
to approximately 0%, interest rates at which depository institutions would lend reserves to other
banks at a certain amount overnight. With the fed funds rate currently fluctuating between 25 to
50 basis points (e.g. .5% = 50 basis points), the interest on excess reserves (IOER) still remained
at a higher rate of 50 basis points. Therefore, banks are more likely to hold cash in excess
reserves as they would earn more with the IOER than the rate from lending reserves. In other
words, quantitative easing provides an arbitrage for banks to earn a higher interest on excess
reserves, since the IOER is considered risk-free and more profitable than conventional lending,
which carries a certain level of risk.
3. As of November 2016, the Federal Reserve currently holds $4.41 trillion of total assets,
with a vast majority of holdings that consist of U.S. Treasuries and mortgage-backed securities.6
QE1, QE2, and QE3 not only affected the Federal Reserve’s balance sheet with more assets and
liabilities, but many banks experienced the impacts as well. The balance sheets of private banks
did not experience inflated numbers compared to the Federal Reserve’s, but instead, a
composition change from the amount of security holdings shifting to reserves on the assets side.7
When the Federal Reserve purchased mortgage-backed securities in QE1, it was implemented to
save the commercial banks and other depository institutions from incurring further asset losses
and risks of long-term bank failures.8 QE1, in addition with the Federal Reserve’s purchase of
U.S. Treasuries from QE2 and QE3, have motivated banks to increase excess reserves, the
amount of holdings to absorb sudden losses from loan defaults, cash withdrawals, or any
macroeconomic circumstances. However, the objective of banks holding more excess reserves
does not always provide benefits for the U.S. economy as a whole. Despite the spread between
the fed funds rate and the IOER, the amount of cash in excess reserves cannot be lent out to the
public as ordinary loans, since lending only applies to depository institutions. The process of
quantitative easing does not directly provide monetary accessibility for the public to spend and
lend, since the transaction of the Federal Reserve purchasing securities is only directed toward
commercial banks and financial institutions.
Nevertheless, quantitative easing is more than just achieving efforts to increase the
money supply or prevent bank failures; it is also aimed to influence long-term government bond
yields by lowering short-term rates in the yield curve. To understand the concept of the yield
curve, it is a line chart that reflects the relationship between interest rates and the maturity of
government securities. In this case, the Federal Reserve can only control short-term rates by
4. buying or selling securities when it seeks to target long-term rates at a certain level. During the
phase of QE2 and QE3, the yield curve becomes flattened as the Federal Reserve continues to
purchase debt securities, thus pushing down short-term rates near 0%.9 The shape of a flattening
yield curve does not always predict the future of the U.S. economy, even when the process of
quantitative easing still persists. As a result of the flattening yield curve, this caused a higher
demand for long-term bonds, resulting in lower long-term yields. Lower yields would enable
more borrowers like new homeowners with mortgage loans or startups with long-term debt to at
affordable rates. As lending continues to increase based on current economic and banking
situations, more economic growth in the U.S. could accelerate in the long-run.
Inflation is an important economic factor that can be impacted as a result of quantitative
easing. It was believed that quantitative easing would lead to hyperinflation for the U.S.
economy; nevertheless, this did not occur as the economy was already in a deflationary state
after the recession.10 Before QE2 took place, the inflation rate was 1.1% as of November 2010,
which was below the standard rate of 2%.11 A low inflation rate, or deflation, can signify slower
economic growth, due to the anticipation of high unemployment and falling prices as consumers
would delay purchases and spending, thus causing prices to fall precipitously.3 The
implementation of QE2 and QE3 was designed to break the cycle of deflation; therefore, the
purpose of increasing the money supply would cause the inflation rate to rise, increasing prices
to drive employment and consumer spending. So far, the current inflation rate for the U.S. is at
1.6% through 12 months ending October 2016.13 Even though the current inflation rate is still
short from reaching 2%, the rate is still expected to rise as the economy continues to grow.
At this point in time, we believe that the current phase of quantitative easing will be able
to achieve more for the desired effects of the U.S. economy in the near future. Overall, the
5. process of QE1, QE2, and QE3 did manage to achieve its goal on jumpstarting the U.S. economy
from the effects of the recession. QE1 alleviated banks and financial institutions from holding
mortgage-backed securities during the subprime mortgage crisis in 2008. However, it did not
accomplish the specific task of spurring high economic growth as banks continued to accumulate
more excess reserves instead of lending with other depository institutions. The implementation
of QE2 and QE3, in response to the insufficiencies of QE1, have accomplished more to spur
economic growth by combating deflation and influencing the yield curve. As of now, it is still
too early to determine whether if the three quantitative easing measures have fully succeeded in
sustaining the U.S. economy for the long-run.