Tuesday, November 16, 2010

The Fed and QE 2

Here are links two great articles about the Fed's QE 2 (not the cruise ship). QE 2, short for quantitative easing round 2, is the label that has stuck to the Fed's current spree of buying assets they don't usually buy. When the Fed buys things (with newly electronically created money) it injects new money into the economy to stimulate it. In QE 2, the Fed is buying longer term U.S. treasuries. In the first round of QE (starting in 2008), the Fed bought all kind of assets including private company debt and mortgage backed securities. Before 2008, the Fed primarily traded in short term U.S. treasuries, and in much lower quantities.

I agree with Alan Blinder that the Fed's newest purchases are not big enough to do very much to lower unemployment. However the Fed (as Yellen points outs) is charged by Congress to try to lower unemployment, so long as prices are stable.

QE 2 has faced tremendous international political heat because it might drive down the dollar (helping U.S. exports but hurting other export driven economies). Oddly, the dollar has strengthened significantly in the last few days. Apparently, concern about the safety of the Euro has driven traders back into the arms of the dollar. It just goes to show you that exchange rates are not very predictable.

1. WSJ Alan Blinder op ed 11-15-2010 in WSJ (WSJ subscription required)

With lessons from Econ 101 - this is article is a great primer on the Fed and monetary policy. Alan Blinder was vice Chair of the Board of Governors from June 1994 to June 1996.

2. WSJ Janet Yellen interview 11-16-2010 in WSJ (WSJ subscription required)

Note: The first woman served on FOMC (Fed's committee for formulating monetary policy) in 1978. Janet Yellen is currently the vice-chair of the Board of Governors of the Fed.

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