Quantitative Easing in US_Group 7_Section A

8/10/2019 Quantitative Easing in US_Group 7_Section A

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Quantitative Easing

GROUP 7Alapati Mahesh

Abhishek Praveen

Barde Shraddha NRadhika Gupta

Snehal Vasant MadnePrashant Kumar


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What Is Quantitative Easing?

Extra-ordinary measures

Crisis- interest rates near 0%

Needed a boost to keep interests down, spur growth and job creation

Federal Reserve (central bank of America) bought trillions worth of US

treasury bonds and mortgage backed securities to increase money supply

and stimulate borrowingBanks supply designated

bond instruments

Fed supplies money to banks

Banks lend funds to

consumers & businesses


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QE1

Dec08-June10

$1.25 trillion spent on MBS and$300 billion of long term treasuries

Fed halted in June 2010 becauseeconomy was growing again. Butwithin 2 months, it began to falter

QE2

Nov10- June11

$600 billion of treasuries Fed was hoping to induce inflation

Recovery still slow

QE3

Sept12- Oct14

$40 billion per month in MBS

Until unemployment fell below6.5% or inflation rose above 2.5%

QE infinity

Fed Tapering

18th Sept13 Fed decided to hold

off on scaling back its bond-buyingprogram

29th Oct14 purchases were halted

after accumulating $4.5 trillion inassets

QE


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Conventional Monetary Policy

Conventional monetary policy operates by setting

a target for overnight interest rates in interbank

markets

Central bank money adjusted to target through openmarket operations

Central bank not directly involved in direct lending to

the private sector or the government Works effectively in normal times


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Unconventional Monetary Policy

Quantitative Easing(QE)aims at affecting monetarybase

Central bank operates

directly-Open markettransactions

Done when conventionalpolicies fails such as wheninterest rates are near the

lower bound Is Printing money

equivalent printingwealth?


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Why resort to QE?

Economic shock so powerfulnominal interests rates needs

to be brought down to lower bound(near zero)

Cutting interest rates further not possibleresort to

unconventional means

Monetary transmission process is significantly impaired

resort to act directly on transmission process by using

unconventional measures


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Evaluation Of QE Three Driving Factors - Price Stability , Reduction in Unemployment rates and Revival in economic

growth.

QE effect on Stock Markets , Inflation Rates , GDP Growth rate , Unemployment rate .

Unemployment rate cooled off from 3 Decade high !

Quite Successful in arresting deflationand bringing back the inflation to historic averages .


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GDP growth restored from negativeto historic averages


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Stock Market , the lead indicator of economic activity , has been quitebuoyant

HDI showed an improvement of 15 basis points in these 6 years

Flip Side

The jury is still out - and will be for a long time - on whether it has worked. A study by the consultants McKinsey, published in 2013, found that the combined effect of low Fed

interest rates and QE had cost US households $360bn . (Younger households - who are more likely to

be borrowers - had gained; older ones - with more savings - had lost.)

No Reasonable Exit strategy .

Book Value Masking ( Most of the Mortgage Backed Securities that FED holds have market prices less

than book price)
http://www.mckinsey.com/insights/economic_studies/qe_and_ultra_low_interest_rates_distributional_effects_and_riskshttp://www.mckinsey.com/insights/economic_studies/qe_and_ultra_low_interest_rates_distributional_effects_and_risks


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QE may lead to inflationFed's QE program as a liquidity

swap.

Commercial banks start lending large

amounts of funds to firms and households.

Low interest rates.

Expected Inflation.


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Why QE has not lead to inflation

Weak loan demand associated with regulatory and cost

uncertainty and a somewhat anaemic recovery.

Capital ratios below their desired or required levels.

Unprofitable lending due to interest rates at or below the cost

of capital.


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Theoretical View

Money growth ==> inflation view. This is based on the equation of exchange:

MV = Py . Now lets go through an example - MV = Py

200 x 5 = 10 x 100

If Money Supply Increases to 400 ,this should happen according to equation

400 x 5 = 20x 100 , But this is subject to assumption of Full Employment and

Constant Velocity and Output Excess money balances actually cause entrepreneurs to raise output to meet the

new demand , MV = Py ; 400 x 5 = 10 x 200

Velocity tends to decline in recessions when people do, in fact, want to hold more

cash

MV = Py

400 x 2.5= 10 x 100

Or it could be some combination of a rise in y and a fall in V


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Why QE has ended?

Improved labor market conditions

Diminish fears of low inflation rate

Scope for further monetary easing through lower policy

rates has become limited , It simply can`t go on buying.

To date, the Fed has amassed a balance sheet of $4.48trillion since it started its quantitative easing strategy in

November 2008.

Current unemployment rate of 5.9%

Short term interest rates near to zero( 0% to 0.25% )


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Drawbacks Of QE Encourage riskier investments

Upward effect on commodity prices wiped out peoples return on savings

Tapering of QE will increase interest rates , reducing

economic growth


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Interest rate hike and Implications

Households Mortgages

Cost to borrowers, New Savers

Higher overall employment

Impact On India

Indias macro picture changed in a year

Muted impact on domestic market

Managing liquidity more important

Reduction in imports improved CAD

Divergent response in EMs and advanced economies


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Thank You!

Documents

Quantitative Easing in US_Group 7_Section A