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Prepared by Sayed HossainMay 6, 2011
Personal website : www.sayedhossain.com
www.sayedhossain.com
1.Explain what is meant by Quantitative Easing and how it is done by the Fed.
2.Explain why QE is similar to conventional (Traditional) monetary policy and also very different.
3. Compare the arguments in favor of completing QE2 with the arguments to end QE2.
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te o
f in
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Money demanded(billions of dollars)
0 50 100 150 200 250 300
10
7.5
5
2.5
0
Dm
ie
Sm
Traditional Monetary Policy
Money supply is decreased from $200 billion, to $150 billion by FED.
Ra
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f in
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st
Money demanded(billions of dollars)
0 50 100 150 200 250 300
10
7.5
5
2.5
0
Dm
ie
Sm
A temporary shortageof money. Interest rate hikes to 7.5 percent in money market
Sm1
Traditional Monetary Policy
Ra
te o
f in
tere
st
Money demanded(billions of dollars)
0 50 100 150 200 250 300
10
7.5
5
2.5
0
Dm
ie
Sm
Traditional Monetary Policy
The money supply is increased from $200 billion,to $250 billion by FED.
Ra
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f in
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Money demanded(billions of dollars)
0 50 100 150 200 250 300
10
7.5
5
2.5
0
Dm
ie
Sm Sm2
Traditional Monetary Policy
A temporary surplusof money. Interest rate is reduced from 5 to 2.5 percent.
Traditional Monetary Policy and Quantitative Easing (QE2)
The targets of both the Traditional Monetary Policy and Quantitative Easing (QE2) are to increase Money Supply and boost Spending.
Traditional Monetary Policy and Quantitative Easing (QE2)
Traditional monetary policy targets Fed Fund Rate while QE2 is targeting Quantity of Money.
Traditional Monetary Policy and Quantitative Easing (QE2)
The Fed Fund Rate is a target to control Short Run Rate while QE2 is targeting Long Run Rate to enhance Spending.
Traditional Monetary Policy and Quantitative Easing (QE2)
Traditional monetary policy is generally implemented by purchasing Short Term Bond while QE2 is implemented by buying Long Term Bond to control Long Run Cost of Borrowing
Why Quantitative Easing (QE2) ?
As Fed Fund Rate has gone down to Almost Zero Percent but fails to bring fruitful results, FED has targeted Long Run Rate under QE2 Program to enhance Spending.
Why Quantitative Easing (QE2) ?
FED has targeted to Buy almost $900 billion Securities (with newly created money) from Market to increase Quantity of Money.
NEGATIVE IMPACTS OF QE2
NEGATIVE IMPACTS OF QE2
1. Prices of commodities, oil etc have gone up. Meaning that Inflation is escalating which is a Hidden Tax.
As a result, living standard is eroding.
NEGATIVE IMPACTS OF QE2
2.Value of dollar is depreciating meaning that US Assets will be less lucrative.
As a result, the Capital/Financial Account Balance of the United States will be Squeezed.
NEGATIVE IMPACTS OF QE2
3. As the dollar is depreciation steadily, the Confidence on US currency is eroding.
So, demand for gold and silver is increasing and hence the prices of gold and silver.
NEGATIVE IMPACTS OF QE2
4. US Credit Rating is declining meaning that US government will have to pay Higher Rates on its Bond.
Hence, deficit will be Increased further. Hence, Debt..
POSITIVE IMPACTS OF QE2
POSITIVE IMPACTS OF QE2
1.Rate of Unemployment Dropped to 8.8 percent (March) but again Increased to 9 percent (April).
POSITIVE IMPACTS OF QE2
2. The risk of deflation has been tackled.
POSITIVE IMPACTS OF QE2
3. Stock prices have Increased, meaning that households’ wealth have gone up.
Spending is likely to go up.
POSITIVE IMPACTS OF QE2
4.Value of dollar is depreciating meaning that US exports will be increasing while imports will decline.
As a result, the Current Account Balance of the United States will be Healthy.
POSITIVE IMPACTS OF QE2
5.Although inflation is registered at 2.7 percent (March), slightly higher than Target 2 percent. It is still manageable.
6. GDP growth rate is Still Positive registered at 1.8 percent in the first quarter of 2011.
Whether QE3 is desirable ?
I can comment on it after June 2011 when the QE2 would be ended by FED.
End
