Define “Quantitative Easing”

That’s why the market bounced up today, there’s talk of quantitative easing.

Go ahead. Tell me what that means…

Comments

  1. No takers?

    Quick and dirty version: QE is “unconventional monetary policy” where the Fed tries to affect longer term interest rates by purchasing various types of longer term debt.

    Recent research suggest such a move could lower the yield on longer term bonds. (http://www.econbrowser.com/archives/2010/09/should_the_fed_2.html).

    I’m not sure that there is an easy answer for why stocks would move up because of this.

  2. J. Strupp says:

    The Fed. is, in effect, using the printing press in an attempt to create inflation in a deflationary environment by exchanging cash for long term debt. It’s a fiscal stimulus of sorts via monetary policy when the Fed. funds rate is near zero.

    I would have assume that the market is looking favorable upon QE2 because it’s an indication that not everyone in Washington has gone completely insane.

  3. Randy in Richmond says:

    I think it’s when you pull that lever on your La-Z-Boy all the way back and ease into a position to the extent that you cannot get more comfortable.

  4. Well good morning sunshine. I bet I still beat you awake by an hour or so.

    I was looking for the printing press answer. Though J. Strupp and I often stand on the opposite of the opinion of such moves, he certainly knows his stuff.

    I’ve spent the last couple of hours trying to decide if I want to act in response to the expected Fed action. I think I’ve decided to wait it out.

  5. Struppster’s a smart guy no doubt. But I think we’ve got a surplus of certitude from the Struppster/Krugman/DeLong camp and I’m not convinced it’s good for the debate.

    QE is literally money from nothing. Believing that’s good policy is proof that you have not “gone completely insane?”

  6. As I said, we often disagree.

  7. Randy in Richmond says:

    QE is a smaller, stealthier form of TARP. It is to benefit banks and financial institutions–without the public outcry.

  8. J. Strupp says:

    Morning Jeremy,

    I think Keynesians are well aware of the losses that the government will take as they unwind QE in the future. And I think it’s still very healthy to debate the effectiveness of QE policy. I completely agree that the jury is still out as to whether or not QE2 will amount to anything more than a transfer payment to the financial sector, especially considering that it’s not going to be accompanied by more extensive fiscal stimulus down the road.

    All I’m saying is that I (and also the market it appears) are looking favorably upon more aggressive montary policy to counter sunsetting fiscal stimulus in a disinflationary environment. If QE does little more than raise inflation expectations and boost equity markets (and consumer confidence to boot) than it’s worth a try.

    P.S. Money backed by the full faith and credit of the U.S. treasury is not money from nothing.