Question

Consider the various impacts of QE1, QE2, and QE3 (Quantitative Easing) ; and explain the reasons for the differences in the market reactions to each of these three policy actions.

Answer 1

Quantitative easing(QE) is a monetary policy tool which is used to purchase a large amount of government security to maintain a stable economy. It used primarily at the time of deflation or negative inflation. The central government buys a huge amount of government securities and raising the price of those assets and reducing the yield and decreases the short term interest rate and it stimulates the money supply in the economy.

At the time of recession the federal reserve held between $700 t0 $800 billion treasury notes just before recession attacked the economy. To control the money supply, the fed again purchased mortgage-backed securities, and it reached its peak at $2.1 trillion in 2010. After the recession the fed compelled to keep the amount of $2.054 trillion. To maintain this level fed started to buy $30 billion treasury notes 2 to 10 year in every month.

The name QE2 is the nickname in 2010 using the second round purchase of treasury notes. The just preceding the QE2 is called QE1. Then the fed announce her third round quantitative easing in September 2010 called QE3. Here the fed decided to buy more treasury notes of $40 billion. Then they decided to keep the bank rate to zero at least in 2015. This helped them to control the housing market debt risk.