Fed - QE Notes
1. Fed actually cannot print money. The Fed cannot directly control money supply. The Fed can control the monetary base
2. The monetary base is the sum of the money supply in the economy and the commercial bank reservers at the Fed. This is not same as money supply.
Monetary base is the narrowest measure of money, is the sum of currency in circulation and bank reseves. Bank reserves are deposits of financial institutions at Federal Reserve Banks, plus the amount of currency and coins held in bank vaults
3. Quantative Easing - is basically "asset swap". The Fed buys an asset from a bank and in return, adds to its reserves
4. Typically Fed changes the federal funds rate target to achieve its dual mandate of maximum sustainable economic growth and price stability. From September 2007 to June 2008, the FOMC incrementally lowered the federal funds rate target from 5.25 to 2 percent.
5. The QE affects the economy throught changes in interest rates on the long-term Treasuty securities and other financial instruments (e.g corporate bonds). To have an appreciable impact on interest rates, QE requires large-scale asset purchases. When the Fed makes such purchases of, for example, Treasury securities, the result is an increased demand for those securities, which in turn raises their prices.
6. QE 1
- Began March 2009 and concluded in March 2010
- Primary Goals - Increase the availability of credit in private markets to help revitalize mortgage lending and support housing market.
- To accomplish this goal, the Fed purchased $1.25 trillion in mortgage-backed securities and $200 billion in federal agency debt
- To help lower interest rates in general (and thaaw the frozen private credit market), the Fed also purchased $300 billion in long-term Treasury securities
- Began in November 2010 and is scheduled to conclude by the end of the second quarter of 2011
- Goal is strengthen the economic recovery and combat a possible Japanese-style deflationary outcome.