The Federal Reserve System, or the Fed, is the central banking system of the United States. After a series of financial panics the Federal Reserve System was created in 1913. Over time the roles and responsibilities of the Fed have expanded and evolved. During the early 2000’s the Fed launched quantitative easing programs named QE 1, 2, 3, and 4. What exactly is quantitative easing and what programs were these? Let’s take a look.
Quantitative easing, or QE, is a monetary policy by which new money is pumped into the money supply by a central bank to stimulate the economy. This policy is often used when standard monetary policies have become ineffective. During the United States’ financial crisis of 2008, the Fed launched its first round of quantitative easing nicknamed QE1 on November 26th, 2008. During this first round of QE the Fed began purchasing debt such as mortgage-backed securities, consumer loans, bonds, and notes to pump cash into its economy and fight inflation.
While some aspects of QE1 proved effective it did not work quite as well as planned and from November 2010 until June 2010 the Fed launched a second QE program called QE2. During QE2 the Fed announced it would purchase $600 billion of Treasury bills, bonds, and notes. About.com says this about QE2:
With QE2, the Fed was trying to spur mild inflation. Why? It wanted to stimulate the economy by increasing demand. When prices rise slowly and consistently over time, people are more likely to buy now to avoid the future price increase. In other words, the expectation of inflation is a powerful driver of demand.
So after taking further actions to stimulate the economy, why did the Fed launch another quantitative easing program? About.com writes this regarding the Fed’s third quantitative easing program, QE3:
…it set a new precedent for Fed policy. In it, Fed Chairman Ben Bernanke boldly announced the nation’s central bank would maintain expansive monetary policy until certain economic conditions were met. In this case, it was until jobs improved substantially. The only other time the Fed did anything like this was when it set an informal inflation rate target of 2%. By setting an employment goal, the Fed took a second unprecedented action. It focused more on its mandate to encourage jobs growth, and less on what had previously been its primary emphasis to fight inflation.
The launch of QE3 showed the Fed was not entirely satisfied their QE programs, but the Fed had one more QE program to launch called QE4. About.com states this:
The Fed effectively ended QE3 in December 2012 by launching QE4. The main change was it ended Operation Twist.
Operation Twist was another QE program in which the Fed used its proceeds from the sales of short-term Treasury bills to purchase long-term Treasury notes. The above article continues, stating:
Instead of exchanging short-term Treasuries for long-term notes, it kept rolling over the short-term debt. The Fed would continue to buy $85 billion a month in new long-term Treasuries and MBS. QE4 set new precedents. Bernanke announced the central bank would continue quantitative easing until either unemployment fell below 6.5% or inflation rose above 2.5%. It would continue to keep interest rates low until 2015. These specific targets encourage economic growth by removing uncertainty. This allows businesses to plan more aggressively thanks to the more stable operating environment.
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