What is USA FED QE3, How it works?
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Posted - 18 Sept 2012
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WHAT IS QUANTITATIVE EASING (QE)?
A central bank buys large amounts of assets -- in this case, bonds backed by housing mortgages -- in an effort to bring down interest rates and boost the economy.
The Federal Reserve has tried quantitative easing twice before, thus earning this round the designation QE3.
HOW DOES IT WORK?
To buy bonds, the Fed essentially creates money from nothing, paying for its purchases by crediting the accounts of banks from which it buys the bonds.
That's a clue as to how it works -- as money piles up in their Fed accounts, earning the paltry quarter-of-a-percentage point in interest that the Fed pays, banks may be keener to lend to companies and people.
If companies use that money to buy equipment, and households use it to buy homes and cars, the economy gets a jump.
WHY IS THE FED DOING IT?
By lowering borrowing costs and spurring banks to lend more, the Fed hopes to induce more spending and eventually set the stage for more hiring.
This time around, the Fed tied its bond-purchase program explicitly to jobs, saying it will keep buying bonds until it sees a substantial improvement in the labor market.
HOW WELL HAS IT WORKED IN THE PAST?
Most studies show that quantitative easing does reduce borrowing costs, as measured by the yield on 10-year Treasuries.
Studies are less clear on how much those lower borrowing costs translate into real economic improvement, such as the creation of more jobs.
One model developed by Federal Reserve Bank of San Francisco chief John Williams last year suggested the Fed's second round of bond-buying -- $600 billion worth -- generated 700,000 additional jobs.