The Three Phases of QE in United States

In the United States, when the economy started to show signs of an extended decline to come, the Federal Reserve had to come up with quantitative easing to fix the situation. When the short-term interest rate reaches or nears zero, monetary policy renders ineffective. To counter the situation and stimulate the economy further, the central bank starts purchasing financial assets and monetary instruments from banks and financial institutes to lower long-term interest rates. As of July 2013, the US economy has evidenced three varied points in time where QE had to be adopted. They are popularly known as QE1, QE2 and QE3, based on their chronology.

The very first implementation of QE, i.e., QE1 took place in November 2008 when the Fed spent $600 billion on purchase of Mortgage-backed Securities (MBS). The spending peaked at over $2.1 trillion in June 2010 on purchases of Treasury, Mortgage, and other securities.[1] Thus, by the end of QE1, the Fed had injected $2.1 trillion into the economy. The value of bonds went higher as expected, but gold also saw a rise in its price. The dollar, however, was suffering a consistent decline, and hit the highest mark since the QE started only when the Fed halted it. [2] The Fed announced the end of QE1 in June 2010 when it was felt that the economy was growing well.

QE2 entered the economy only three months away from the departure of QE1. Although the Fed had found that the economy was growing, it wasn’t growing as strongly as they desired. In November 2010, the Fed started the second round with purchase of $600 billion worth of Treasury securities along with an added investment of $250-300 billion in treasuries from the profits of the previous investments.[3] The plan was spread over the next 8 months with an end in sight around June 2011. The Fed maintained a portfolio of $2 trillion, and the end of another round witnessed the same result as gold prices soared again. [4]

The Fed had to fall back on QE for the third time in September 2012. QE3 was different from its predecessors because the Fed, this time, chose to have a monthly approach for purchases instead of buying it in bulk with the total budget over a period of time. The initial budget was $40 billion/month [5] which got raised to $85 billion by December 2012.[6]

A significant event between QE2 and QE3 was the Fed’s decision to apply Operation Twist in September 2011. Operation Twist is quantitative easing in which the Fed sold its short-term Treasury Bills, and used the funds to buy long-term Treasury Notes instead of buying short-term Treasury Bills again. [7]

However, the Fed announced in June 2013 that they intend on tapering the stimulus efforts owing to increased stability in the economy, progress in the job market, and a steady inflation rate. It was further revealed that QE3 will be brought to a complete halt by mid-2014.[8] However, the Fed Chairman Ben Bernanke also made it clear that the change will be contingent upon the progress saying “Policy is in no way predetermined,” and “Our policies are tied to how the outlook evolves.” [9]






Criticism of Quantitative Easing

Liquidity Trap

Quantitative Easing

Zero Lower Bound Problem


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