Quantitative Easing

Easing Quantitative easing is a fiscal policy where the United States Federal Reserve buys long-term assets, usually securitized by mortgages and also U.S. treasuries. This is done with the main aim of decreasing the long-term interest rates. Low interests also favor the individual investors. This is an advantage to the American economy as it has plenty of investments coming into the country (Cochrane, 2011).

Quantitative Easing was used to stimulate the economy following the "Great Recession." At the start of the financial crisis, the European Central Bank did not decrease its rates. However, when the Lehman Brothers' institution collapsed, the ECB cut its key interest rates to historic low levels. In the period between October 2008 and May 2009, the rate was reduced to 1%.

In particular, the positive impact of this monetary policy was that it boosted economic activity by stimulating the banks and financial institutions to lend and also for the increase in spending by consumers (Fahr et al., 2011; Labonte, 2016). How long of an effect will Quantitative Easing have on the U.S. economy? In the 2014 fiscal year, the Federal Reserve ended QE3 and that was the culmination of the Fed's bond buying program. From 2008 to 2014, the Fed purchased mortgage-backed securities and Treasury bonds worth $4.5 trillion.

However, the Fed went on to draw down on its purchases progressively, until it got to the zero level. However, it is imperative to note that the Fed is still undertaking Stealth Quantitative Easing. This takes into account purchasing more bonds with the interest that the Federal Reserve attains on the bonds that it has already bought. Therefore, this quantitative easing will continue having an effect on the U.S. Economy until the Fed shrinks its balance sheet by the amount of interest that it obtains (Burnham, 2014).

What are the currency implications when it is implemented? When Quantitative Easing is implemented with the main purpose of stimulating the domestic economy, the measures of monetary policy have an indirect impact on the exchange rate, which in turn causes the currency to decline. QE causes the currency to weaken as it makes the exports to become comparatively cheaper and therefore stimulates the economy (Johnston, 2015). In fact, quantitative easing can be understood as a form of currency manipulation. What happens to the U.S.

debt and what effect does debt leveraging have? The implementation of Quantitative Easing does have influence on the level of internal debt. However, it is imperative to note that this does not necessarily have a direct impact on the national debt because it encompasses the swapping of bank reserves as an asset for bonds.

However, debt leveraging has an indirect impact on the level of debt as quantitative easing decreases the amount of national debt through the decrease in interest payments and through the strengthening of economic activity, which in turn increases tax revenue (Gagnon, 2013).

What is more, debt leveraging, which is also referred to as debt deflation has the effect on the economy of increasing the level of borrowing allowed by the banks, which in turn instigates the level of spending by the consumers in the market and in stimulating the overall economic activity (Engen, 2015). Will there be room for more quantitative easing in the future if we were to go into a recession? There will be less room for more quantitative easing in the future if the U.S.

were to go into a recession. According to Durden (2016), replications of the FRB/U.S. model of an austere recession propose that comprehensive asset purchases and advancing direction about the forthcoming path of the federal funds rate ought to have the capacity to provide enough extra accommodation to completely compensate for a more restricted capacity to curtail cut short-term interest rates in most, but almost certainly not in all situations (Durden, 2016).

In essence, the Fed is, by this time, considering a situation in which a shock to the economy gives rise to further Quantitative Easing of either $2 trillion, or in a worst-case scenario, $4 trillion, effectively doubling up the present size of the Fed's balance sheet (Durden, 2016). However, that is not successfully countered if the fed funds and 10yr yields are not able to go negative. In addition, if projected rates are, by this time, low; then forward guidance loses a lot of room (Durden, 2016).

Does this cause Inflation and could it lead to potential deflation? Quantitative Easing causes inflation. However, it does not give rise to potential deflation. What is more, it cannot lead to deflation simply for the reason that the state of the economy was already deflationary when it started. When the Fed implemented QE, there was a considerable rise in prices in the course of that period (Dent, 2014). However, it is imperative to note that in comparison to historical measures, inflation was restrained and was not deemed a hyperinflation.

Quantitative Easing was employed to make certain that the economy did not experience a deflationary spiral. Therefore, the recession faced by the United States was a deflationary phenomenon. Quantitative Easing injected money into the system that gave rise to an increase in prices. However, there is no prospective.