What Does Quantitative Easing Accomplish / Do for Interest Rates? Financial Markets (2008)

What Does Quantitative Easing Accomplish / Do for Interest Rates? Financial Markets (2008)



The US Federal Reserve held between $700 billion and $800 billion of Treasury notes on its balance sheet before the recession. In late November 2008, the Federal Reserve started buying $600 billion in mortgage-backed securities.[38] By March 2009, it held $1.75 trillion of bank debt, mortgage-backed securities, and Treasury notes, and reached a peak of $2.1 trillion in June 2010. Further purchases were halted as the economy had started to improve, but resumed in August 2010 when the Fed decided the economy was not growing robustly. After the halt in June, holdings started falling naturally as debt matured and were projected to fall to $1.7 trillion by 2012. The Fed's revised goal became to keep holdings at $2.054 trillion. To maintain that level, the Fed bought $30 billion in two- to ten-year Treasury notes every month.
In November 2010, the Fed announced a second round of quantitative easing, buying $600 billion of Treasury securities by the end of the second quarter of 2011.[39][40] The expression "QE2" became a ubiquitous nickname in 2010, used to refer to this second round of quantitative easing by US central banks.[41] Retrospectively, the round of quantitative easing preceding QE2 was called "QE1". Similarly, "QE3" refers to the third round of quantitative easing following QE2.[42][43]
A third round of quantitative easing, QE3, was announced on 13 September 2012. In an 11--1 vote, the Federal Reserve decided to launch a new $40 billion per month, open-ended bond purchasing program of agency mortgage-backed securities. Additionally, the Federal Open Market Committee (FOMC) announced that it would likely maintain the federal funds rate near zero "at least through 2015."[44][45] According to NASDAQ.com, this is effectively a stimulus program that allows the Federal Reserve to relieve $40 billion per month of commercial housing market debt risk.[46] Because of its open-ended nature, QE3 has earned the popular nickname of "QE-Infinity."[47] On 12 December 2012, the FOMC announced an increase in the amount of open-ended purchases from $40 billion to $85 billion per month.[48]
On June 19, 2013, Ben Bernanke announced a "tapering" of some of its QE policies contingent upon continued positive economic data. Specifically, he said that the Fed would scale back its bond purchases from $85 billion to $65 billion a month during the upcoming September 2013 policy meeting.[49] He also suggested that the bond buying program could wrap up by mid-2014.[50] While Bernanke did not announce an interest rate hike, he suggested that if inflation follows a 2% target rate and unemployment decreases to 6.5%, the Fed would likely start raising rates. The stock markets dropped approximately 4.3% over the three trading days following Bernanke's announcement, with the Dow Jones dropping 659 points between June 19 and 24, closing at 14,660 at the end of the day on June 24.

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