Understanding and Impact of Quantitative Easing 2 (QE2)
What Was QE2?
QE2 refers to the second installment of the Federal Reserve’s quantitative easing (QE) program, aimed at revitalizing the U.S. economy in the aftermath of the 2008 financial crisis and subsequent Great Recession. This phase, initiated in November 2010, saw the Federal Reserve infuse an additional $600 billion into the economy through the purchase of U.S. Treasuries and reinvestment from earlier purchases of mortgage-backed securities.
Key Points
- Increase of $600 Billion: QE2 expanded the Federal Reserve’s balance sheet by $600 billion.
- Stimulating Monetary Policy: Quantitative easing involves a central bank purchasing assets to inject money into the economy.
- When Interest Rates are Low: Central banks resort to QE when interest rates are near or at 0%, making traditional monetary policy ineffective.
- QE2’s Legacy: This round of easing was later followed by QE3 in September 2012.
Understanding QE2
Through quantitative easing, central banks purchase government bonds or other financial assets to stimulate economic activity, especially when conventional methods (like lowering interest rates) are ineffective due to rates being at or near zero. This method boosts the money supply, which can elevate inflation risks. While pioneering the use of QE, the U.S. is not the only country employing this monetary policy; many central banks across the globe adopt different versions of quantitative easing.
When QE2 was launched, the U.S. was experiencing a sluggish recovery. Despite a rebound in stock markets, the unemployment rate stubbornly lingered at 9.8% — well above the levels seen during the Great Recession. The primary objective of QE2 was to enhance bank liquidity and encourage inflation, as consumer prices remained relatively stagnant.
Initially, the move led to a rise in interest rates, with the 10-year yield exceeding 3.5%. However, by February 2011, just three months post-announcement, the 10-year yield started a two-year descent, dropping by 200 basis points to below 1.5%.
Impact of QE2
QE2 received mixed reactions. Many economists acknowledged that while it did bolster asset prices, uncertainties around the banking sector’s health persisted. Given it had only been two years since the Lehman Brothers’ collapse, investment via affordable money seemed judicious to many. Yet, critics highlighted that previous rounds of easing had lowered interest rates but failed to significantly increase lending. Additionally, concerns were raised about the long-term risks of creating money from nothing, speculating that it might pave the way for runaway inflation once economic stability returned.
Two years on, the Federal Reserve proceeded with QE3, but this round was met with greater skepticism. Critics argued that the Fed’s balance sheet had already ballooned significantly, signaling a need for alternative strategies.
Related Terms: Quantitative Easing, Monetary Policy, Federal Reserve, US Treasuries, Inflation, QE3, Interest Rates.
References
- Board of Governors of the Federal Reserve System. “FOMC statement - November 03, 2010”.
- Board of Governors of the Federal Reserve System. “Federal Reserve issues FOMC statement - September 12, 2012”.
- U.S. Bureau of Labor Statistics. “Databases, Tables & Calculators by Subject”.
- U.S. Bureau of Labor Statistics. “Consumer Price Index Historical Tables for U.S. City Average”.
- Macrotrends. “10 Year Treasury Rate - 54 Year Historical Chart”.
