Quantitative Easing Explained

There has been a lot of buzz in financial markets regarding the Federal Reserve announcing quantitative easing. The figure of quantitative easing has been speculated to be about $500 billion to $1 trillion dollars, so what does quantitative easing implies, well the answer to it is that it refers to pumping of money by the central bank by purchasing the government securities or equivalent from the markets which results in increase of money supply in the market. The underlying assumption behind quantitative easing is that quantitative easing would increase the money supply and hence banks would start lending, which will stimulate the growth in the economy.

Quantitative easing is often used when rate of interest have already been lowered close to 0% levels but easing of interest rates has failed to stimulate the growth in the economy. The biggest risk of quantitative easing is that it will fuel the inflation and it may become unsustainable and in worst case can even lead to hyperinflation across the world as there will be lot of liquidity due to this action of Federal Reserve. The biggest beneficiaries of this action by Federal Reserve will be commodities market and developing markets as more liquidity leads to increased risk appetite among people.

Quantitative easing therefore should be used keeping the inflation factor in mind and Federal Reserve should be proactive and take this quantitative easing back if there are some signs of inflation becoming monstrous. Whether Federal Reserve can do it or not is a question which only time can answer, however one thing is for sure that there are not much options left with Federal Reserve in order to stimulate the economy as well as job market of the United States.

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