Would QE2 Have a Significant Effect on Economic Growth, Employment, or Inflation?

Discussion in 'Wall St. News' started by ASusilovic, Oct 14, 2010.

  1. Federal Reserve Bank of St. Louis

    The Federal Reserve significantly increased bank
    reserves and the monetary base after Lehman
    Brothers announced on September 15, 2008, that it
    had filed for chapter 11 bankruptcy protection.

    The Fed took additional steps toward quantitative easing (QE) on
    March 18, 2009, when it announced that it would purchase
    up to $1.725 trillion in mortgage-backed securities and
    government and agency debt. Recent speculation that the
    Federal Open Market Committee (FOMC) may purchase
    an additional large quantity of government debt to stimulate
    economic growth, increase employment, and prevent deflation
    has prompted considerable debate over the effectiveness
    of additional quantitative easing (QE2). This synopsis
    analyzes some of the central issues in this debate.

    One key issue is whether additional large-scale securities
    purchases by the Fed would cause interest rates to decline
    significantly. Recently Gagnon et al.1 used several methods
    to investigate the effect of the FOMC’s announced securities
    purchases ($1.725 trillion) on the 10-year Treasury yield,
    which they estimate to be in the range of 38 to 82 basis
    points. Some might conjecture that an FOMC commitment
    to purchase, say, an additional $1 trillion in securities could
    reduce the 10-year yield by a comparable amount (22 to
    48 basis points). These estimates may be too large and
    need to be confirmed by further research. Moreover, some
    commentators (e.g., Narayana Kocherlakota, president of
    the Minneapolis Fed2) have suggested QE2’s effect on
    Treasury yields may be “muted” because financial markets
    are functioning much better than they were in the spring
    of 2009.

    There is another reason that the effect on interest rates
    could be small. Banks are currently holding about $1 trillion
    in excess reserves rather than making loans and increasing
    the supply of credit to the non-banking segment of the
    credit market. It is possible—perhaps even likely—that
    almost all of any increase in the supply of credit associated
    with QE2 simply would be held by banks as excess reserves.

    If so, the effect of QE2 on interest rates could be small and limited to an announcement effect—the effect associated
    with the FOMC’s announcement—independent of the
    effect of the FOMC’s actions on the credit supply.
    Even if QE2 did affect interest rates, many believe that
    the effect on output or employment would be small.

  2. Good for Refi's. That's about it. Bad if you regularly eat, heat/cool your home or use gasoline.
  3. This whole idea of QE II is a bitter joke....:(
  4. Moral of the story: refinance your house then minimize your food/shelter/clothing/energy expenses by living like a survivalist in your back yard. What fun.
  5. Yet another desperate, bubblicious experiment by the Fed... CONSEQUENCES BE DAMNED!! :(
  6. emg


    QE II is buying more stocks to pump stocks up! encourage biz to hire!
  7. FED could do it much easier :

    FRBNY cash hand out to every US citizen at this address :

    Federal Reserve Bank of New York
    33 Liberty Street
    New York, NY 10045
    Tel: (212) 720-5000 or (646) 720-5000