The United States Enters The Era Of Quantitative Easing

In March 18th, the latest measures announced by the Federal Reserve raised investor sentiment. On the same day, the New York stock market reversed the intraday drop, and the three major indexes rose sharply.

After nearly 40 years, the Federal Reserve again announced the massive acquisition of US Treasury bonds, which formally announced that the United States entered the era of quantitative easing monetary policy.

On the 18 day's latest monetary policy meeting, the Federal Reserve announced the decision to buy a total of US $300 billion in the next six months. It is expected that the first acquisition will take place later next week.

In the next six months, 300 billion to 18 days after buying Treasury bonds, after the conclusion of the two day monetary policy decision meeting, the Fed issued a statement saying that in order to effectively improve the private credit market environment, the Fed will purchase 300 billion US dollars of long-term treasury bonds in the next six months.

Last time, the Fed's intervention in the price of Treasuries went back to the 60s of last century.

At that time, the Federal Reserve bought large treasury bonds in order to influence the yield curve, fight the recession and eliminate the trade deficit.

At the same time, in order to give more support to the housing market, the Fed also announced that it would buy $750 billion of the "two room" secured mortgage bonds, which allowed its related bonds to reach US $1 trillion and 250 billion this year. At the same time, the Fed will also purchase 100 billion dollar Fannie bonds, so that the related institutional bonds purchased this year will reach US $200 billion.

As a result, the size of the Fed's purchases of mortgage securities will expand to $850 billion to $1 trillion and 450 billion.

When it officially entered the era of quantitative easing, economists said that after announcing the acquisition of treasury bonds, the Fed formally shifted its policy focus to quantitative easing, though the authorities did not explicitly put it forward.

The so-called quantitative easing refers to the central bank's intention to create new liquidity for the economic system through various means to encourage spending and borrowing.

Generally speaking, the monetary authority will take this extreme action only if the conventional tools such as interest rates are no longer effective.

The acquisition of US Treasury bonds can push up the price of treasury bonds and drive down yields, helping to lower long-term interest rates.

Correspondingly, this will drive other kinds of interest rates to fall, because the interest rates on many loans and securities assets are based on US Treasury bonds.

In the context of the current financial institutions' serious credit crunch, the government especially feels the need to lower interest rates.

Goodfriend, a former economist at the Richmond regional bank of the Federal Reserve, said the announcement of the acquisition of treasury bonds signifies that the Federal Reserve has issued a signal to launch the third strong bailout policy, that is, to launch an independent quantitative easing policy.

Before that, the authorities have used up interest rate tools and launched a number of financing arrangements to thaw private credit.

Before the Fed, the Bank of England on the other side of the world had launched the acquisition of treasury bonds, which had to seek more new ways to stimulate a deep recession economy after the interest rate dropped to a low of 0.5% for several hundred years.

IMF's latest forecast suggests that the British recession is likely to end in 2011.

In Japan, the central bank announced this week that it will substantially raise the scale of the acquisition of treasury bonds to further improve the financing situation.

Japan's interest rate has also been reduced to only 0.1%.

Tao Dong, a Credit Suisse economist, believes that the Fed's "bad plan" is also inevitable.

The US benchmark interest rate has dropped to zero. In the context of interest rate policy being exhausted, the Fed has to resort to other weapons to continue its efforts to promote economic expansion.

"With the interest rate policy coming to an end, quantity expansion has become the main force."

The latest bailout decision made by the Federal Reserve is based on the background that interest rates have dropped to zero and the US economic recession has continued to deteriorate.

In a statement after the meeting, the Fed admitted that the US economy continued to shrink since the last meeting of interest rates at the end of January.

Rising unemployment, falling stock and house prices and tight credit conditions are putting pressure on consumer confidence and consumer spending.

At the same time, enterprises are also facing many plight such as weak sales and financing difficulties, and have to slash stocks. The decline in demand in overseas markets will bring more shocks to domestic enterprises.

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