Quantitative Easing

GROUP 7
Alapati Mahesh
Abhishek Praveen
Barde Shraddha N
Radhika Gupta
Snehal Vasant Madne
Prashant Kumar

What Is Quantitative Easing?

Extra-ordinary measures
Crisis- interest rates near 0%
Needed a boost to keep interests down, spur growth and job creation
Federal Reserve (central bank of America) bought trillions worth of US
treasury bonds and mortgage backed securities to increase money supply
and stimulate borrowing
Banks supply designated
bond instruments

Fed supplies money to banks

Banks lend funds to

consumers & businesses

QE2

QE1
Dec08-June10
$1.25 trillion spent on MBS and
$300 billion of long term treasuries
Fed halted in June 2010 because
economy was growing again. But
within 2 months, it began to falter

Nov10- June11
$600 billion of treasuries
Fed was hoping to induce inflation
Recovery still slow

QE
QE3
Sept12- Oct14
$40 billion per month in MBS
Until unemployment fell below
6.5% or inflation rose above 2.5%
QE infinity

Fed Tapering
18th Sept13 Fed decided to hold
off on scaling back its bond-buying
program
29th Oct14 purchases were halted
after accumulating $4.5 trillion in
assets

Conventional Monetary Policy

Conventional monetary policy operates by setting
a target for overnight interest rates in interbank
markets
Central bank money adjusted to target through open
market operations
Central bank not directly involved in direct lending to
the private sector or the government
Works effectively in normal times

Unconventional Monetary Policy

Quantitative Easing(QE)
aims at affecting monetary
base
Central bank operates
directly-Open market
transactions
Done when conventional
policies fails such as when
interest rates are near the
lower bound
Is Printing money
equivalent printing
wealth?

Why resort to QE?

Economic shock so powerful nominal interests rates needs
to be brought down to lower bound(near zero)
Cutting interest rates further not possible resort to
unconventional means

Monetary transmission process is significantly impaired

resort to act directly on transmission process by using
unconventional measures

Evaluation Of QE

Three Driving Factors - Price Stability , Reduction in Unemployment rates and Revival in economic
growth.
QE effect on Stock Markets , Inflation Rates , GDP Growth rate , Unemployment rate .
Unemployment rate cooled off from 3 Decade high !

Quite Successful in arresting deflation and bringing back the inflation to historic averages .

GDP growth restored from negative to historic averages

Stock Market , the lead indicator of economic activity , has been quite buoyant

HDI showed an improvement of 15 basis points in these 6 years

Flip Side
The jury is still out - and will be for a long time - on whether it has worked.
A study by the consultants McKinsey, published in 2013, found that the combined effect of low Fed
interest rates and QE had cost US households $360bn . (Younger households - who are more likely to
be borrowers - had gained; older ones - with more savings - had lost.)
No Reasonable Exit strategy .
Book Value Masking ( Most of the Mortgage Backed Securities that FED holds have market prices less
than book price)

QE may lead to inflation

Fed's QE program as a liquidity
swap.

Commercial banks start lending large

amounts of funds to firms and households.
Low interest rates.
Expected Inflation.

Why QE has not lead to inflation

Weak loan demand associated with regulatory and cost
uncertainty and a somewhat anaemic recovery.
Capital ratios below their desired or required levels.
Unprofitable lending due to interest rates at or below the cost
of capital.

Theoretical View

Money growth ==> inflation view. This is based on the equation of exchange:
MV = Py .
Now lets go through an example - MV = Py
200 x 5 = 10 x 100
If Money Supply Increases to 400 ,this should happen according to equation
400 x 5 = 20 x 100 , But this is subject to assumption of Full Employment and
Constant Velocity and Output
Excess money balances actually cause entrepreneurs to raise output to meet the
new demand , MV = Py ; 400 x 5 = 10 x 200
Velocity tends to decline in recessions when people do, in fact, want to hold more
cash
MV = Py
400 x 2.5 = 10 x 100
Or it could be some combination of a rise in y and a fall in V

Why QE has ended?

Improved labor market conditions

Diminish fears of low inflation rate

Scope for further monetary easing through lower policy

rates has become limited , It simply can`t go on buying.

To date, the Fed has amassed a balance sheet of $4.48

trillion since it started its quantitative easing strategy in
November 2008.

Current unemployment rate of 5.9%

Short term interest rates near to zero( 0% to 0.25% )

Drawbacks Of QE

Encourage riskier investments

Upward effect on commodity prices
wiped out peoples return on savings
Tapering of QE will increase interest rates , reducing
economic growth

Interest rate hike and Implications

Households
Mortgages
Cost to borrowers, New Savers
Higher overall employment
Impact On India
Indias macro picture changed in a year
Muted impact on domestic market
Managing liquidity more important
Reduction in imports improved CAD
Divergent response in EMs and advanced economies

Thank You!