QE2: The Second Round of Quantitative Easing

QE2, short for the second round of quantitative easing, was a monetary policy implemented by the Federal Reserve (the Fed) in the United States from November 2010 to June 2011. It followed the initial quantitative easing (QE1) program which was launched in the wake of the 2008 financial crisis.

Background

Following the near-collapse of the financial system and the subsequent recession, the Fed had already lowered its benchmark interest rate, the federal funds rate, to near zero. With traditional monetary policy tools exhausted, the Fed turned to unconventional measures like quantitative easing to stimulate the economy. QE1 primarily focused on purchasing mortgage-backed securities to stabilize the housing market.

Despite QE1, the economic recovery remained sluggish. Unemployment remained high, inflation was low, and there were concerns about deflation. The Fed aimed for an inflation rate of around 2%, and data suggested they were falling short of this target. This prompted the Fed to consider further action, leading to QE2.

Implementation

QE2 involved the Federal Reserve purchasing $600 billion of longer-term Treasury securities over an eight-month period. The goal was to lower long-term interest rates, making it cheaper for businesses and individuals to borrow money. Lower interest rates were intended to encourage investment, spending, and ultimately, economic growth. The Fed also aimed to boost inflation expectations, which they believed would further stimulate demand.

Rationale

The Fed’s rationale behind QE2 was multi-faceted:

• Lower Interest Rates: By purchasing Treasury bonds, the Fed increased demand, driving up bond prices and pushing down yields (interest rates).
• Stimulate Investment and Spending: Lower interest rates were intended to make borrowing more attractive, encouraging businesses to invest in new projects and consumers to purchase goods and services.
• Increase Inflation Expectations: The Fed hoped that QE2 would signal its commitment to fighting deflation and that it would successfully raise inflation expectations, leading to increased spending in anticipation of rising prices.
• Support Asset Prices: Some economists believed that QE2 would also support asset prices, such as stocks and real estate, leading to increased wealth and further stimulating economic activity.

Criticisms and Effects

QE2 was met with considerable debate and criticism. Some argued that it risked inflation, currency devaluation, and asset bubbles. Critics also suggested that it primarily benefited wealthy individuals and institutions, while doing little to help the broader economy. Some international critics accused the US of deliberately weakening the dollar to gain a competitive advantage in trade.

The actual effects of QE2 are still debated among economists. Some studies suggest that it had a modest positive impact on economic growth, inflation, and unemployment. Others argue that its effects were minimal or even negative. It’s difficult to isolate the impact of QE2 from other economic factors that were at play during the same period. Generally, it is accepted that QE2 did contribute, however modestly, to keeping the US economy from slipping further into recession.

QE2 ended in June 2011. The Fed later implemented additional rounds of quantitative easing (QE3 and QE4) to further support the economy.