Quantitative Easing is a complex monetary policy that essentially involves pumping money into the economy.
This method is used solely by central banks as it involves buying different financial assets from places such as commercial banks.
This is done in order to stimulate the nation’s economy and in certain cases to lower interest rates.
In the US QE has been used since late 2012 due to the country’s stumbling economy. The Federal Reserve Bank has since been purchasing different assets, primarily US government debt, in the amount of $85 million per month.
This has in effect lowered interest rates and mortgages thus further stabilizing the nation’s economy by allowing an increase in consumer spending.
Currently, the Federal Reserve Bank believe that the economy is now secure enough to begin the process known as ‘tapering’. Tapering involves easing the amount injected into the economy by minimizing the expense of purchasing financial assets from the country.
The Federal Reserve are expected to reduce the money injection down by anywhere from $10 billion to $15 billion. This reduction will be increased at a time in the near future which the Fed Bank deems fit.
The cash injection into the US economy had a large impact on the housing market. Interest rates on loans and mortgages were incredibly high in 2009 and many families had difficulty paying off any of their debt.
With QE the rates have dropped to all-time lows proving to be a huge benefit and allowing citizens to pay off existing debt. This in turn has cause the housing market to steadily recover.
Although the tapering is set to begin sometime this month, many speculate that the Federal Reserve will continue to purchase mortgage debt.
This is due to the growing fear that if the stop the monetary assistance the property market will dip down into new lows.
The Federal Reserve Bank has stated that they plan to begin tapering as soon as unemployment reaches 7% and currently, it is at 7.3%. Sceptics say that this is an ineffective way to measure unemployment as many people have left the country due
to lack of opportunity and employment thus shrinking the labour force.
Many people are still unemployed and finding increasing difficulty in finding jobs. Due to the global recession in 2008, many lost their jobs due to companies downsizing and even closing down.
It order for the economy to make a full recovery, new businesses must come to the surface in order to create more employment opportunities and it is for this reason that many are sceptical that the Federal Reserve Bank will not begin tapering at this time.
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