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¶ … easing and how the implications of the Federal Reserve policy will affect the financial markets moving forward
Quantitative easing is one of the tools of the Federal Reserve and other central banks around the world to affect the money supply of the nation. Quantitative easing is often called the process of 'making money' out of nowhere (Q&A: Quantitative easing, 2012, BBC News). Traditionally, during periods of economic contraction, the Fed tries to stimulate the economy by lowering interest rates. It also lowers the discount rate, or the rate at which member banks can borrow from the Fed. The lower the rate, the greater the incentive for both consumers and member banks to borrow funds, and increased borrowing leads to increased spending. As consumers and businesses spend more, the economy gets stimulated by the upturn in consumption, more workers are hired, and eventually the recession abates and the Fed can increase...
The need for quantitative easing was particularly acute during the last recession, given that interest rates had already been effectively lowered to zero. "Central banks tend to use quantitative easing when interest rates have already been lowered to near 0% levels and have failed to produce the desired effect" (Quantitative easing, 2012, Investopedia). This was the case before the election of 2008. Despite the low interest rates designed to stimulate the economy, consumers were afraid to spend because of worries about losing their jobs. Consumers were also severely overleveraged because of the fallout from the housing market, and homes are usually Americans' primary assets. Because of the high default rates, banks were reluctant to lend money to consumers.
In such a scenario, quantitative easing is required. To create an influx…
References
Q&A: Quantitative easing. (2012). BBC News. Retrieved:
http://www.bbc.co.uk/news/business-15198789
Quantitative easing. (2012). Investopedia. Retrieved:
http://www.investopedia.com/terms/q/quantitative-easing.asp#axzz1ovBydnq8
The timing of the quantitative easing is therefore essential. The first round of QE in 2009 essentially served the purpose of stabilizing the economy; the second round is intended to sustain the ongoing economic recovery by providing sufficient capital in the system that the positive momentum generated in the economy will eventually become a feedback loop of its own that results in the restoration of GDP growth and a reduction
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However, aggregate supply always responds, eventually, to demand so aggregate supply will fall as well, until there is a state of equilibrium again. 3. Increasing the amount of deposits that commercial banks must hold with the central bank will diminish the money multiplier, which is the amount of money a bank can create with each dollar of reserves. The money multiplier is determined by the reserve ratio. The higher the reserve
Liquidity shocks on the international arena can have a strong negative impact on less developed countries whose access to funding sources is already reduced. The clearing risk is a specific risk, which combines credit risk, in the sense that it results from a counterparty's inability to meet its liabilities, market risk in the sense that it is caused by market shifts (general and specific market risk) between the time a