Federal Reserve Jeffery Lacker

Quantitative Easing: The Difference between QEI, QEII & QEIII

Quantitative easing is here to stay.

In the U.S., we are on the threshold of another, the third, tranche of monetary easing in the face of a reluctant economy that is not up and running as fast as the regulators would like.

Quantitative Easing: The Difference between QEI, QEII & QEIII

Though the economy is improving, unemployment remains at stubbornly high levels. This and other factors prompted the FOMC to express the likelihood of another round of “monetary accommodation” in the minutes of the meeting on July 31, and the remarks bear repetition for their significance:

“Many members judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery. Several members noted the benefits of accumulating further information that could help clarify the contours of the outlook for economic activity and inflation as well as the need for further policy action.”

“Many participants expected that such a program could provide additional support for the economic recovery both by putting downward pressure on longer-term interest rates and by contributing to easier financial conditions more broadly,” the minutes indicate. “In addition, some participants noted that a new program might boost business and consumer confidence and reinforce the Committee’s commitment to making sustained progress toward its mandated objectives.”

Following this, Ben Bernanke made remarks at the Jackson Hole meet that effectively clinched that QE3 was definitely on its way – only its mode, and timing remain to be decided.

“We must not lose sight of the daunting economic challenges that confront our nation,” Bernanke said. “The stagnation of the labor market in particular is a grave concern, not only because of the enormous suffering and waste of human talent it entails, but also because persistently high levels of unemployment will wreak structural damage on our economy that could last for many years.”

A final decision is awaited at the FOMC meeting on September 13, yet opinion is divided whether a QE3 could materialize at all. Morgan Stanley is of the view that QE3 may not happen and the Fed will instead keep interest rates low. HSBC is at the opposite end and offers plausible reasons for QE3 to be announced soon: 1. The FOMC minutes 2. The Bernanke remarks at Jackson Hole 3. An announcement at the Oct meet would be too close to the elections. They say, “If the FOMC fails to act on September 13, its next opportunity would be December 12, which may be considered an unacceptable delay given the fiscal problems looming at the end of the year”.

This logic sounds reasonable, and the odds are therefore reasonable that we shall soon see QE3.

What shape could it take?

QE1 took the route of across-the-board purchases of treasury notes, mortgage-backed securities (MBS), and bank debt.

QE2 resorted to buying of $600 billion of treasury securities. The attempt was to lower yields and thereby lower mortgage rates, in order to help boost the economy.

On QE3, no indications are available on its shape and size. However, it would not be out of place to mention that, across the pond, in the U.K., the favored tool has been the purchase of government issued bonds for its QE, the total amount of which could reach 325 billion pounds.

But a recent Bloomberg survey provided valuable insight on what the Fed could do: 34 out of 48 economists surveyed, felt that QE3 would involve the purchase of both mortgage-backed securities (MBS) and Treasury notes. However, 13 felt that it would be entirely MBS. On size, the median estimate of the survey was for an amount of $600 billion, the same as QE2.



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