US Quantitative Easing Policy
Abstract: due to the impact of the financial crisis lead to the US economic downturn. With unemployment stubbornly high, the Federal Reserve decided to make quantitative easing policy. Through the issuance of bonds to raise cash in order to more directly inject liquidity to the market. That is in order to boost stock prices. With low interest rates, the government encouraged enterprises borrow money for expanding the production. Eventually, promote the economic growth. However, QE is risky and it probably causes hyperinflation. How did QE work? Analysis from three aspects, they are labor market, stock market and consumer market. In the labor market, QE did not have a remarkable promotion effect on the economy. Conversely, QE drove an upturn in the stock market. In the consumer market, QE has a greater effect on oil price than the other commodities. In addition, QE lead to U. S. dollar devaluation. Therefore, QE is an important way to regulate economic activity.
Policy Background:
The global financial crisis erupted in 2008. Slower U.S. economic growth and a high level of unemployment impel the government made difficult and risky decisions. At the end of 2008, interest rates dropped to 0.63, and then at the begging of 2009, interest rates dropped to 0.25 and it persisted until now. With the interest rates close to zero, Federal Reserve cannot through lower its interest rates to revive the economic. Therefore, the central bank creates money by buying government bonds and other financial assets in order to increase money supply and the excess reserves of the banking system. In addition, quantitative easing (QE) is an unconventional monetary policy used by some central banks to stimulate their economy when conventional monetary policy has become ineffective.
Here is a look back at the QE announcements:
• November 25, 2008: $100 Billion GSE direct obligations, $500 billion in MBS
• December 16, 2008 FOMC Statement: Evaluating benefits of purchasing longer-term Treasury Securities
• January 28, 2009: FOMC Statement: FOMC Stands ready to expand program.
• March 18, 2009: FOMC Statement: Expand MBS program to $1.25 trillion, buy up to $300 billion of longer-term Treasury securities
• March 31, 2010: QE1 purchases were completed at the end of Q1 2010.
• August 27, 2010: Fed Chairman Ben Bernanke hints at QE2: Analysis: Bernanke paves the way for QE2
• November 3, 2010: FOMC Statement: $600 Billion QE2 announced.
• June 30, 2011: QE2 expected to end.
Until now 16 months has passed, how did quantitative easing work?
Labor Market:
Finger 1
Figure 1 reflects unemployment rate from 2001 to 2011. Compare with the section before financial crisis, unemployment rate is very high until now. Even if QE has been used from Nov. 2008, unemployment continues to rise at a peak on Oct. 2009. It looks like QE didn’t have obvious effect on American economics. However, economics are incredibly complex phenomena, and cannot leave final conclusion casually. Last month, the unemployment rate is 8.8% which is the lowest level in the past few months. Thus, from trends, unemployment would eventually start falling but very slowly.
QE2 expected to end on June, 2011. If labor market is not improving by then, QE3 may be started. Employment situation is the key to the whole economic recovery. On the present situation, return to the normal level (5% to 6%) of unemployment rate still need a long time.
Stock Market:
Figure 2
Figure 2 reflects the relationship between S&P 500 and Quantitative Easing. There are several turning points on the value line. The first, QE1 announced on Nov. 2008, and then the S&P 500 closing prices increased slightly. And after this, the S&P 500 continue to fall. Effect of QE1 was faintness. Besides, the lowest point appeared on Mar. 2009. At that time, QE1 expanded the scale. In the next months, S&P 500 continue to increase since then. Another turning point