Quantitative Easing Explored Essay

The Federal Reserve is adjusting to what some call the “new normal.” After the most recent recession the United States has experiences a slow recovery which has a notable disconnect between inflation and unemployment. Further, banks hold high excess reserves and the Fed has a balance sheet which includes over $1.7 trillion in mortgage backed securities (Quarterly, 2017, p.4). As such the Fed has had to rethink its past procedures in order to maintain its dual mandate of maintaining unemployment and price levels. While it has been a decade since this recession began the economy is just now showing signs of strength and such the Fed is beginning a process of “normalization.” To do this the Fed’s has changed its stance on monetary policy in

These ultra-low rates of interest have worked to drug up corporate profits, artificially push up stock prices and lower the cost of debt financing for ultra-leveraged up corporations, debt riddled home owners and most of all, the ‘monumentally’ indebted federal government. This stimulatory drug masquerades itself as try economic stability and growth but in reality it is nothing of the sort, a dangerous dependency has set. The Federal Reserve is now the biggest buyer of mortgages and US debt (treasuries), my question would be; how is it that we believe suddenly stopping QE will not result in a complete economic collapse? In a nutshell, the Fed now “is” the housing market! There is no entity currently capable of filling in the void of the Fed’s purchasing power, when that buying program seizes to be, interest rates will “have” to rise. The problem is, our ultra-leveraged up bubble dependent economy could not handle such turbulence, if interest rates rise on bank lending interest rates on credit for American consumers will rise significantly as well. If yield rates rise on Treasury bonds even by a few percentage points, the US government will have to pay “significantly” higher rates of interest on the National debt. With our outstanding treasuries currently standing at over “17 Trillion dollars”, even rising by a few percentage points could result in default. How we ever got ourselves into such a mess is beyond

Due to the diversity of Joe and Bob’s professional backgrounds, their positions on how to restore the economy will be painted by their own personal experiences. Bob, being employed by the Federal Reserve Bank, would recommend that the Federal Open Market Committee (FOMC) adjust the monetary policy. The FOMC has the power to adjust the amount of dollars in the economy and set the interest rates for banks to borrow from. (Mankiw, 2012, p.626) The Fed could seek to reduce the discount rate which would encourage banks to borrow from the Fed—thus increasing the money supply and the quantity of reserves. Additionally, with lower interest rates, banks would be more willing to lend to borrowers, which also stimulates the economy (p.633).

Therefore, one of the expansionary activities conducted by the Federal Reserve is to set federal fund rate lower, which will affect credit availability, the money supply, interest rates, and security prices. That is to say, ceteris paribus, when the Federal Reserve buys securities in the open market, bank’s reserve accounts (deposit and assets) increases and when the discount rate is lowered it reduces the interest rate in the economy, thereby promoting borrowing, excessive spending by the economic agents, possibility that household, business and government will invest in fixed assets, increment in household purchasing durable goods (plant , state and local government and construction of new

The FED decided to carry out its bond purchasing program in August to help prevent deflation (Hauser, 2011). The article could have turned out much differently if the FED did not step up and take action. In addition the FED has the authority to adjust interest rates in accordance with the current economic condition. Currently the FED is willing to curb inflation by adjusting the interest rates at a moment’s notice (Hauser, 2011). The FED’s invisible hand can sometimes help prevent major economic disasters.

A monetary policy was also implemented to fight the Great Recessions, Traditionally the monetary policy could not be implemented since the Federal Reserve has a Zero Bound Problem. This meant that the interest rates were already set at 0 by the central bank and could not be lowered any further since a negative figure would lead to a non-investment (Hetzel, 2012). The Federal reserve instead developed a monetary policy by the name Quantitative Easing to try and reduce the effects of the recession. QE was implemented by the federal reserve by buying assets, for example, they bought cooperate bonds from banks for cash in order to add more supply of money in the economy. In a normal case, the federal government would purchase the bonds from individual to increase money but during a recession the no private bonds available for purchase. Therefore, the federal government is forced to buy other assets.

Monetary policy has to be forward looking in order to allow the market to form expectations accordingly. Hence, it was appropriate in September to start gradual increases in the federal funds rates in order to exit gracefully from the prolonged accommodative trend. Quick increases in rates at a later date will present a higher risk for economic recession. Seeing limitations in monetary policy, the President suggested turning to “policies that encourage investments in technology and human capital, tax and regulatory changes, and longer-run fiscal

James Bullard from the St Louis Fed, said recently that the increase in asset prices was not sufficient proof of quantitative easing’s guilt in raising inequality because asset valuations are more normal now than they in the years after the financial crisis. “This suggests that quantitative easing had no medium term implications for U.S. income and/or wealth distribution. It is only as good or bad as it was before the crisis”.

During the recession of 2008-2009, the Bank of England used ‘Quantitative Easing’ as part of their monetary policy. This includes creating money electronically such as government bonds from banks to buy assets. Deflationary pressures are avoided and an increase in the money supply is seen

It is evident that we take action now to aid our economic activity. We can do this by adopting an expansionary monetary policy to stimulate our economy. The Federal Reserve has historically held rates at a relatively low level, but it is important that we gradually increase rates as our economy strengthens. Just last week our nation saw that, “the Federal Reserve sent a sharp, simple message to financial markets (on Wednesday): Pay attention. The Fed is thinking seriously about raising its benchmark interest rate at its next meeting, in June.” Our economy is not quite ready to tighten monetary policy. Expansion is relatively easy for the Fed to implement, and can be put in to action quickly. The Fed is already holding rates at very low level, but it is tough to predict what other global economies will do in the near future to stimulate their own respective economies. As a nation, I believe that in this moment in time, we need to continue the expansionary trend until we are stable enough to make great moves towards an ideal state for an economic

The 2007–09 financial crisis highlighted both the vulnerability of the financial system to liquidity shocks and the associated role of central bank lending.1 In particular, the crisis was characterized by severe disruptions to the money markets where banks and other financial institutions acquire short-term funding. As institutions became unwilling to lend to each other, the cost of borrowing in short-term funding markets, as indicated by the spread between Libor and overnight index swaps (OIS), rose to unprecedented levels and the flow of credit in financial markets became severely disrupted (Figure 1). 2 To replace the funding normally provided in these markets and thereby keep credit flowing to U.S. businesses and households, the Federal

The 2007 global financial crisis, which was regarded as the most serious financial crisis since the Great Depression, still influences the global economy today, especially the U.S. economy. This paper mainly concentrates on the effect of fiscal policy during the recession by analyzing the size of the Keynesian multiplier. In particular, the core question is to measure the effect of the fiscal stimulus plan that amounted in an additional $20 billion in spending per quarter (measured in 2005 dollars) starting from the first quarter of 2008 to the last quarter of 2009. This paper will identify the origin of the financial crisis of 2007, explain why conventional expansionary monetary policy is ineffective in this case, argue for the

The Fed turned to unconventional monetary policy to create financial stability in order to prevent recession. In conventional monetary policy, the Fed raises supply of bank funds to lower interest rates. During a recession, the central bank will purchase only treasuries in the open market because they are risk free. However, that does not guarantee that the economy will be restored. So they turn to unconventional monetary policy when in severe recession. In unconventional monetary policy, as mentioned above, the Fed uses quantitative easing by lending a huge amount to banks or even firms. They purchase other securities, aside from T bills, in the open market to lower interest rates. The main goal is to lower interest rates.

The discount rate is also lowered allowing the banks to worry less about debt and loan to people with lower credit scores. This encourages people to make loans because of the lower interest rates which increase investment and consumer spending; this makes the economy expand ending recessions.

Therefore, the quantitative easing adopted from 2009 was trying to gradually resume sustainable economic growth. Quantitative easing has helped to avert what could have been a second great depression (Wall Street, 2011). The US economy has been clawing its way out of the recession in 2009 and recovery has been slow compared to previous economic cycles. Regular review of the pace of securities purchase by the Federal reserve and the overall size of asset-purchase program in light of incoming information and adjusting the program as need be will help foster maximum employment and price stability.