Quantitative easing can be described as the initiatives taken by the U.S Federal reserve in trying to improve the country’s economy (Iley and Mervyn 168). Traditionally, the Federal Reserve has been lowering short-term rates to spur economic growth. Conversely, qualitative easing involves buying bonds when the rates of interest cannot be lowered anymore. QE3 is a term used to refer to the recent initiative by the Federal Reserve to encourage the growth of the economy. It involves buying long-term debt instruments, comprising mortgage-backed securities. QE denotes quantitative easing while ‘3’ is used to imply that it is the third effort made by the Federal Reserve since the economic recession started.
Even though it is believed that QE3 can boost the lagging U.S economy, it may lead to higher inflation rates than estimated especially if the prerequisite easing amount is overrated and too much currency is generated by purchasing liquid assets. Alternatively, it may fail to stimulate demand particularly when banks remain hesitant to advance money to businesses or households. The banks started to purchase mortgage-backed securities and capital bonds in the dawn of 2008 to curtail the mortgage rates and spur the housing market. Even though most people believed their efforts assisted in stopping the economic meltdown, the weak growth resulted in the subsequent round of easing in the year 2010, which was closely followed by the introduction of QE3. Economic analysts anticipate that QE3 would result in an improvement in market liquidity. This would have an impact on further increasing the inflation rate. Generally, developing markets such as India will appreciate QE3. It will accelerate the inflow of cash to developing markets from external institutional investors. Part of the extra money created by QE3 will be directed to developing markets since they are better-placed with regard to economic advancement. In the local markets, the funds invested by foreign institutions are projected to stay strong in the short-term and medium-terms. This could result in major challenges associated with high liquidity and the inflation rates will remain high (Duncan 67).
In most cases, increasing the money supply has the effect of depreciating the exchange rate of the country’s currency against other currencies. One of the major impacts of QE3 is to increase the money supply. The overall impact of this would be weakening the value of the dollar against the major currencies such as the Euro, Pound, Yen, and RMB. The Federal Reserve will expect that a weaker dollar would have a constructive effect on the present trade inconsistencies. Nevertheless, the exchange rates will be governed by many other global issues like developments in the other nations (Murphy 105).
QE3 will also have the effect of increasing US current account balances. The Federal Reserve made the decision of purchasing $40 billion in mortgage-based securities. According to economic analysts, this would result in an increase of $85 billion of liquidity every month. Purchasing mortgage-based securities in large volumes could result in an increase in the cost of the securities. The expectations of such impacts will be experienced soon by benefitting the bank share prices that escalated after the announcement of the policy. In summary, QE3 eases the tail risk of a complete economic recession; however, it will doubtfully result in continuous economic recovery. In short term, it will encourage the investors to take risks and it will kindle a meek asset boost. Nevertheless, the equity increment in price is anticipated to fail in the long run and will reduce corporate revenues and success.
Works cited
Duncan, Richard. The New Depression: The Breakdown of the Paper Money Economy. Singapore: John Wiley & Sons Singapore Pte. Ltd, 2012. Print.
Iley, Richard A, and Mervyn Lewis. Global Finance After the Crisis: The United States, China and the New World Order. , 2013. Print.
Murphy, John J. Trading with Intermarket Analysis: A Visual Approach to Beating the Financial Markets Using Exchange-Traded Funds. Hoboken, N.J: Wiley, 2013. Internet resource.