QE2 Merits And Demerits?

Federal Reserve has warned for months about the ailing US.

This is known as the second round of quantitative easing by the Federal Reserve.

Federal Reserve officials launched the project in November last year, hoping that the project would prevent the United States from being very low.

They also sought to stimulate economic growth by pulling down long-term interest rates, boosting share prices and the prices of corporate bonds and other financial assets.

Fed officials claim that employment will grow faster after the launch of the project.

Although they successfully eliminated deflation worries through the project, the current economic growth rate of the United States is slower than that of the project, and the employment market situation has weakened after experiencing a rapid improvement, and its impact on the financial market has been mixed.

The share price has risen, and the yield of corporate bonds has decreased, which is conducive to economic growth.

But the price of oil, grain and other commodities has soared, which has caused consumers pain.

Another consequence of QE2 may be the continued decline in the US dollar exchange rate, although Fed officials have not said this is their policy goal.

The depreciation of the US dollar has both advantages and disadvantages to the US economy.

A weaker dollar will make American manufactured goods cheaper in the world market, thus helping to increase US exports, but also increasing the cost of imports of the United States, thus pushing up inflation.

The dollar exchange rate has fallen before the Fed launched the QE2, and it is still on a downward path.

Overall, the US economy will grow by 2% in the first half of this year, the slowest half year growth rate since the start of the current economic recovery.

James Hamilton, an economist at the University of San Diego in California, said no one would lie to himself that the Fed had some power to solve all the problems in the United States. Hamilton,

QE2 has produced side effects both in the United States and abroad.

Critics say that because the Federal Reserve has injected too much money into the financial system and weakened the dollar, commodity prices have been pushed up, which has further boosted the global inflation rate.

Some of these criticisms may be overstated.

Ben Bernanke, the Federal Reserve Chairman, made clear in her speech on August 2010 in Jackson Hole, Wyoming, that she intends to introduce quantitative easing policy, and since then crude oil prices have hovered around $75 a barrel for a month.

Just after this year's political turmoil in the Middle East, oil prices soared to more than $100 a barrel.

Fed officials say the rise in commodity prices is mainly driven by global demand, especially by fast-growing economies such as China.

According to the Fed's quantitative easing plan, it will buy US $600 billion in treasury bonds from November last year to June this year.

The purchase process is actually a process of injections into the financial system.

Fed officials insist that by reducing the long-term bonds held by private investors, the Treasury bond purchase plan has depressed long-term interest rates to a certain extent, making the financial environment more relaxed.

According to Fed officials, the impact of the purchase of treasury bonds is equivalent to a 0.75 percentage point reduction in the federal funds rate, which is a short-term interest rate controlled by Fed officials, which can affect other borrowing costs in the US economy as a whole.

If it is a positive move to cut short-term interest rates at ordinary times, the Fed can not do so now because the interest rate has been lowered to near zero.

Fed officials said they were meritorious because they succeeded in preventing the US economy from slipping into deflation.

According to Barclays Capital, when Ben Bernanke published his intention to launch QE2, the price trend of the options market shows that investors believe that the possibility of deflation in the US economy in 2011 is close to 40%.

Today, the probability is about 10%.

Evans, President of the Federal Reserve Bank of Chicago, said in an interview earlier this month that there was a risk of anti inflation, but then it was removed from the worksheet in Chicago.

Quantitative easing seems to boost stock prices to a certain extent.

The day before Bernanke's speech at Jackson Hole, the standard & Poor's 500 index (S&P 500 index) closed at 1047.22.

Over the next week, the index rose 4%, a 10% rise in one month.

But the rise in share prices may be more attributable to American companies, even though the Federal Reserve did not make efforts to increase its stock valuation, and the profits of those companies in 2010 also rose by 29% over the same period last year.

Under normal circumstances, the Fed's policy plays a role in the interest rate sensitive industries such as real estate.

Now, its policies bring less benefits to the real estate industry, because the industry is already heavily indebted.

Since August last year, new housing starts in the United States have fallen from about 600000 units to 560 thousand units at an annualized rate, and house prices fell by 3% according to the S&P/Case-Shiller housing price index.

Wrightson ICAP bond market analyst and economist Crandall (Louis Crandall) said that the final assessment of the Fed's quantitative easing plan was that they did their best during the time when Fed officials were extremely worried.

However, there are still doubts about the plan.

Fastenal Co., a company based in Nona, Minnesota, USA, sells bolts, screws and nuts. Its chief financial officer, Flo Kniss Dan, said that quantitative easing did not benefit the company.

If a good business needs loans and deserves loans, I think they can get loans whether or not there are quantitative easing policies, he said.