The Federal Monetary Quantitative Easing Policy - An Overview For Beginners

Since the latest recession, the Federal Reserve has instilled periods of quantitative easing, also known as QE. This term is what the policy of buying bonds and assets to increase economic growth has been called by the Fed. By the end of 2013, a tapering process for the bond-buying was supposed to begin but has recently been put on hold by the Reserve.

But what exactly is quantitative easing, how does it work, and how does it affect the economy?

What is Quantitative Easing?

Quantitative easing is the name of the Federal Reserve’s program for buying bonds from its member banks. The purpose of quantitative easing is simply to reduce interest rates and increase growth of the economy.

QE3, the most recent policy, has the Reserve buying 85 billion dollars of bonds every month to push money into the economy. Recently, the Fed has announced that it will eventually phase out the amount of purchases if the economy improves. Yet the tapering will begin later than expected.

How Does Quantitative Easing Work?

The Federal Reserve credits the banks’ reserve accounts in exchange for MBS and Treasuries. The reserve account is the amount that each bank must have when they close nightly.

According to the Reserve Requirement, the banks must have 10% of deposits at the local Federal Reserve Bank or in cash.

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When the Federal Reserve adds credit, the banks have an extra amount on reserve, which can lead to banks lending to other banks. When the banks try to release their reserves to other banks, the interest rate drops (this is the Fed funds rate, the root for all interest rates).

Why do they do it?

Quantitative easing increases the supply of money because lower interest rates allow the banks to increase their amount of loans, which allows business to expand and consumers to take out credit.

This keeps the dollar’s value low, making stocks seem more attractive to foreign investors, as well as American goods for exporting.

Does it work?

After the creation of the bond-buying program, rates fell slightly. For the average rate of a 30 year mortgage, the rate went from 3.55% at the creation of QE3 to 3.35% in May, according to Freddie Mac. There has also been a 17% increase since the launch of QE3 for sales of existing homes.

The San Francisco Federal Reserve Bank published a report in the summer that stated QE2, a quantitative easing program dealing with asset-buying, added less than one percent to the rate of economic growth overall, but 2.8% initially. This overall did not help much to spur growth and create jobs. The report said that any growth was mostly due to the low interest rates, allowing people to make long term investments.

As stated in The Economist, Unemployment has gone from 8.1% to 7.3%. The goal was to stop QE when it hit below 7%, yet job growth has slowed down again, with the labor-market participation at the lowest it has been in over 30 years. Debt rates across the nation have fluctuated as well, with people relying on services such as National Debt Relief to assist them in financially difficult times.

Will interest rates rise, if bond purchases end?

It’s already happening. Since the idea of ending the stimulus caused an increase by 1.2 points since its arrival in May; new home sales have decreased steadily since July, as did contracts to buy older homes.

How will it affect the economy’s recovery?

On September 18, the Federal Reserve released a statement about QE and the decision to not instill tapering quite yet: “To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens.”

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The Chairman of the Federal Reserve, Ben Bernanke, said that the Fed will decrease its bond buying if they think the economy is gradually improving but if growth stalls again, the bond buying will continue. Bernanke also said that if the economy grows faster than expected, the bond-buying will end sooner than its expected mid-2014 date.

Dave Landry Jr. is a small-business adviser and investor who enjoys blogging and interacting with financial consultants and entrepreneurs on the web. He hopes you enjoy this article.

Major & Minor Economic Indicators That Tell The Future

How To Forecast Economic Growth By Stacy Pruitt. Predicting currency movements is what allows you, as a forex trader, to benefit from the forex market. However, foretelling the future isn't exactly the easiest thing in the world to do. After all, if it were, everyone would be in the FX game. Yes, there is trading software out there, and your broker can be a potentially valuable source of news information, but you're not going to make any significant headway without a basic understanding of the major and minor economic indicators that drive currencies.

Gross Domestic Product

Otherwise known as “GDP.” This indicator represents all of the goods and services produced by domestic or foreign companies. The GDP tells us the rate of growth of a country's economy. It's one of the most valuable pieces of information you can have when trying to make a trade. A GDP on the rise is good for a country.

Industrial Production

The manufacturing sector accounts for roughly one-quarter of the U.S. economy. In most industrialized nations, manufacturing is a cornerstone of the economy. Industrial production is a chain-weighted measure of the change in production of a nation's factories. It also includes mines and utility services. Sometimes, this is referred to as “capacity utilization.” When capacity utilization is low, it could be signaling a softening market.

Purchasing Managers Index

This index is published by the Institute for Supply Management. It details the new production orders, supplier delivery times, backlogs, inventories, prices and a host of other information. Knowing this is like pulling back the curtain on an economy to see how strong or weak it is.

Producer Price Index

The producer price index measures price changes in manufacturing. Average changes in selling prices are also tracked. Knowing whether prices are trending up or down can give you a clue about possible inflation or deflation in a sector. Alternatively, a nationwide increase or decrease in in prices may signal broad inflation or deflation. It's very helpful when determining which currency is strong or weak against another.

Consumer Price Index

This is a well-known index that measures the average price level for a fixed basket of goods and services. This index measures only urban consumers which translates to roughly 80 percent of the population. Still, it's a useful measure to gauge the health of a nation.

Durable Goods

Durable goods refers to new orders placed with domestic manufacturers for immediate or future delivery. A durable good is something that is expected to last at least three years in service. Since many durable goods include cars, mobile phones, refrigerators, and even toys. These are, more or less, staples in a typical household and so are a good measure of economic health. If buying of durable goods increases, it may mean that consumers have more disposable income due to a strengthening economy.

Geo-Politics

Politics plays a huge role in currency movements. Because a nation's currency is controlled by a central bank, and subject to political pressure and influence, political news has a dramatic impact on what a nation's currency will do. Take Greece, for example. When its leaders first announced that it could not repay its debt, the forex market went wild. Savvy investors made a lot of money.

Interest Rates

The U.S. dollar is the world's reserve currency, and every other currency in the world is tied to it. The dollar is heavily influenced by interest rates, since its money is essentially nothing more than monetized debt. This means that the central bank buys government debt, and issues currency in exchange for the debt. That currency enters the marketplace. If the money entering circulation exceeds production, inflation results. If currency is being taken out of circulation, it may result in deflation.

Consideration

There you have it. These are the basics, but don't be fooled by them. Just because they're “basic” doesn't mean they aren't useful. While most forex traders are chasing an algorithm, you would do well to keep at least one eye on the fundamentals. Often, they will tell you something that a candlestick cannot.

Author Bio:

Guest post contributed by Stacy Pruitt, a freelance forex strategy and finance writer. Stacy writes about advanced trading and forex indicator charts.

Corporate Bonds – A Safe Haven For 2012

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Why You Should Buy Homes Right Now - An Advice From Billionaire Warren Buffett

"Now is a good time to buy a home and finance it with a 30-year mortgage, says Warren Buffett, Berkshire Hathaway chairman/CEO. Buffett discusses why he wants to invest in more businesses, explains why he bought eight European stocks at the end of 2011 and also shares why he decided to invest in the Omaha World-Herald." live on CNBC.

An Overview Of The Year-To-Date Performance Of Major World Indices 2012

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U.S. GDP Growth Breakdown Over The Past 30 Years

How Do We Grow From Here? By EconomipicData. The chart below breaks out nominal GDP by real GDP per hour worked and hours worked (which combined make up real GDP per capita), population growth (which added to real GDP per capita equals real GDP growth), and inflation (which added to real GDP growth equals nominal GDP growth) over rolling ten year periods. As can be seen, the "lost decade" has resulted in GDP growth levels at generational lows.



Source: EconomPic

U.S. Long-Term Interest Rate History From 1831-2011 And 10-Year T-Bond Yield History Since 1900

Here are two interest rate charts of the long-term finance costs in America. They also include the 15-year mortgage rates history. The historical data of the interest rates via charts is a good indicator to judge the development over decades.

Bill Gross Is Reacting On Fed Decision

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