Quantitative Easing

The Federal Reserve announced a plan to buy $600 billion in government debt with the intent of driving already low interest rates lower. The central bank will buy back debt $75 billion a month through next June. This latest round of quantitative easing is referred to as “QE2” because it follows the first round of quantitative easing when the Fed spent $1.7 trillion buying government debt after the collapse of the economy at the end of 2008 through earlier this year. The problem – nobody knows if it will actually work.


Here is how it is supposed to work. The Fed buys Treasury Bonds from banks. This provides banks with cash to lend to customers. At the same time, buying a large amount of bonds lowers interest rates because demand for Treasury bonds leads to higher prices and lower yields. Lower rates entice businesses and consumers to take out more loans. As an investor, lower yields make bonds, CDs, and money markets less appealing. Therefore, businesses will buy equipment while individual investors pour money into investments like stocks. As stock prices take off, consumer confidence rises and businesses see a rise in sales which leads to hiring. Many economists call this the “wealth effect”. People who feel wealthy, spend more.


There are dangers associated with quantitative easing. It has the potential to make a weak dollar even weaker which can lead to currency disputes with other countries. A weak dollar can help companies that export goods. However, it can make imports like fruit more expensive to the American consumer. Many experts also speculate that quantitative easing will lead to wild inflation or may create asset bubbles as asset managers leverage cheap debt to buy speculative investments.


History will be the judge of the effect, if any, of the Feds second round of quantitative easing. As the old saying goes: only time will tell.

Kevin McNab

This article is written by Kevin J. McNab. Kevin is President of ACE Wealth Partners, LLC and is a CFP®, ChFC®, and CRPC®. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. The views expressed in this blog post are as of the date of the posting, and are subject to change based on market and other conditions. This blog contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Please note that nothing in this blog post should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax or legal advice. If you would like investment, accounting, tax or legal advice, you should consult with your own financial advisors, accountants, or attorneys regarding your individual circumstances and needs. No advice may be rendered by ACE Wealth Partners, LLC unless a client service agreement is in place. If you have any questions regarding this Blog Post, please Contact Us. Please read our website DISCLOSURE carefully for additional information.