Recently, the Federal Reserve announced to end the Quantitative Easing (QE) poli
ID: 1109073 • Letter: R
Question
Recently, the Federal Reserve announced to end the Quantitative Easing (QE) policy designed to stimulate the economy. QE is the Federal Reserve’s program of purchasing government bonds, which is in effect an open market operation, one tool of the Federal Reserve’s monetary policy. Study this policy in more detail and provide how ending QE affects the interest and the economy in a few pages. You can use various sources. When you do that, you need to identify the sources and write in your own words.
Explanation / Answer
Quantitative easing avoids the deflationary pressure and it also increases economic growth. The central bank will stop buying more bonds if they erase QE.
Affects on the interest and economy:
1. Falling bond prices and rising yield prices: The bonds have become more attractive with the falling and rising prices. The investors are now more interested in purchasing bonds.
2. If banks buy bonds from the Central Bank, there will be a fall in their cash reserves which could lead to lower bank lending as they have to maintain their liquidity reserves. The banks will not be able to lend more money because of the shortage of cash with them.
3. Higher bond yields may lead to higher rates in the economy. Higher rates will make it difficult for the firms to borrow. If the firms will not borrow, this will lead to low investments.
Erasing QE immediately will lead to higher bond yield and a fall in the stock which will cause economy to slowdown.Quantitative erasing may be necessary when there is maximum growth to avoid demand pull inflation factors.
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