Posts Tagged ‘QE’

Rejuvenating the Economy – Quantitative Easing (QE)

Friday, December 28th, 2012

Fundamental and Technical analyst alike are employing news to guide their trading decisions. Though their degree of usage may vary, it’s better for beginner traders to familiarize themselves with terms that are usually found within the news. Quantitative Easing for one.

Quantitative Easing is an unconventional monetary policy used by central banks to induce support on an economy. It is a stimulant aimed to assist an economy if in case it is in an unfavorable state. The concept behind it is that additional money will flood the market which will give the economy a push by by promoting an increase in lending and liquidity.

It is often carried out by buying financial assets from commercial banks and other private institutions with the newly created money to induce a specific amount of money in the economy.

At present, the world has already witnessed the said boost for three times already. First was during the time of George Bush back in 2008 wherein $500 billion was initially spent on mortgage backed securities. An additional $750 billion was made during the time of Barack Obama’s first term. By June of 2010, $2.1 trillion worth of assets was already bought by the bank.

The second round was demonstrated in 2010 when Federal Reserve provided $600 billion for long-term government bonds. Some claim that this effort was put in vain because the money just ended up in EU’s foreign reserves.

The third was the most recent. The buzz started when Ben Bernanke, chairman of the Federal Reserve in America, had announced last September 14,2012 that the third round of the quantitative easing will be given for the $40 billion a month bond purchasing program and also to continue the very low rates policy.

Though the unconventional way boosted the economy at first, its effect is dwindling as years passes by. Doubts and debates regarding its effectiveness arose from every corner and some became pessimistic about it. The previous rounds taught traders that they should perceive the possible chain reactions that the third easing will produce rather than just the short term effect.

Stephen Stevenson