Insight No.2 – 8 October 2010

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Set Sail on the QE2

In financial markets, QE2 is not a luxury ship destined for an exotic location!

QE2 is the acronym given to the US Federal reserve’s anticipated 2nd round of Quantitative Easing (QE2). ‘Printing money’ is the more colloquially term for quantitative easing. Ben Bernanke, Chairman of the US Federal reserve indicated at the September Federal Open Market Committee (FOMC) meeting that quantitative easing would be used if necessary to help stimulate the US economy. The expectation is that QE2 will be launched at the November FOMC meeting. The extra cash in the system is intended to help address the unemployment problem in the US by increasing cash levels of banks and hopefully providing better access to finance for smaller businesses.

In today’s electronic age, quantitative easing is implemented by the central bank crediting itself with a debt and then using the created money to purchase assets from banks (e.g. bonds and mortgage backed securities). While this practice is typically inflationary and devaluing of the country’s currency, the difference between the US embarking on this strategy and a struggling 3rd world country is that the US Federal reserve will ultimately sell the assets it has purchased and wipe out the paper debt it created (quantitative tightening).

Generally speaking, a country’s central bank will use control of interest rates as a preferred tool to influence unemployment and inflation. In Australia, our official cash rate is currently 4.50% (left on hold after Tuesday’s Reserve Bank meeting). If stimulation of our economy is required, there is plenty of room to reduce rates, as we experienced during the GFC. In the US, the cash rate is 0.0 to 0.25%, there is not much room to drop rates!

Disclaimer and Disclosure
This publication has been prepared and issued by Forty Seven Financial Planning. While the information contained in this document has been prepared with all reasonable care no responsibility or liability is accepted for any errors or omissions or misstatement however caused.