Friday, September 24, 2010

What is Qauntitative Easing

After its last monetary policy meeting the US federal reserve started talking about a possibility of quantitative easing driving the market high to heaven. Now let us explain what quantitative easing is and find out whether it is good or bad for the US economy and currency market. Quantitative easing is not a complex transaction. The FED exchanges overnight deposits for treasury bonds extending liquidity by pushing private sector savings to the financial markets, i.e. quantitative easing is not just printing money or throwing from a helicopter, it is just an asset exchange transaction, just a swap. It means that when implementing quantitative easing policy, the Federal Reserve pumps money into economy (increasing supply of money) in order to prevent from inflation. Risks include the policy being more effective than expected. That is it, so there is no panic for the market.

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