After the 2008 market crash many economist believed that something drastic had to be done to return the US economy to full employment within a reasonable time frame. The US Government was too fractured to implement the Fiscal Policy required and thus the US Fed reserve decided to implement Quantitative Easing.
What is QE?
Quantitative Easing is an unconventional monetary policy used by central banks to stimulate the national economy when standard monetary policy has become ineffective. A central bank implements quantitative easing by buying specified amounts of financial assets from commercial banks and other private institutions, thus increasing the monetary base. This is distinguished from the more usual policy of buying or selling government bonds in order to keep market interest rates at a specified target value.
The US is currently in their 3rd round of QE and the Fed Reserve is currently buying $85 billion worth of bonds each month to help stimulate the economy. Recent expectations were that Ben Bernanke (the president of the Federal Reserve) would announce they will taper the QE with about $10-15 billion less buying occurring each month. After the Fed minutes Ben Bernanke announced that they would not taper and keep buying $85 billion worth of bonds each month. The following day we saw stocks rally as this was not expected. People expected that Ben Bernanke would start implementing this tapering as his term as Fed president ends at the start of the New Year. Now that Lawrence Summers withdrew himself for election Janet Yellen is the front runner for the next Fed president and she will have a tough job ahead of her.
But what effect will this no tapering have on the US?
Well if this QE keeps on without any tapering some people feel that the same will happen to the US as what happened to Zimbabwe, but is this a viable argument? If we look at what happened in Zimbabwe we can see that they followed a policy that increased the money supply in circulation to help build liquidity, unfortunately this was not sustainable and ended up seeing Zimbabwe experiencing the worst Hyperinflation the world has ever seen. The Z$ finally met its end in 2009 when the one-hundred-trillion note was issued.
But the US QE story is a little bit different as that they are not simply helicopter dropping money into the system. They are buying bonds to stimulate the economy and keep interest rates low and to keep unemployment low. The idea is to give the stuttering economy a shove forward, not to nurse it back to full health
The Fed is likely to concentrate on areas where it can make a strong analytical case about how policy will change in future, which is likely to be shared by whoever takes over the top job. Ms Yellen the top candidate is a bit more “Dovish” that Mr Bernanke. This means that she is likely to want to continue the QE policy for even longer than he would.