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Quantitive Easing Essay

2258 words - 10 pages

Team #5: Fernando Puiggari, Afiya Williams, and Yu Tang
MBAA 505: Economic Environment Of Business
Prof. Victor Petenkemani
Case 3: Due 10/30/2014
Quantitative Easing in the Great Recession.

1. You will consider the various impacts of QE1, QE2, and QE3. What accounts for the differences in the market reactions to these three policy actions?

What the Fed did
* On Sept. 8, 2008, the U.S. Treasury seized control of mortgage giants Fannie Mae and Freddie Mac and pledged a $200 billion cash injection to help the companies cope with mortgage default losses.
* About a week later the government bailed out American International Group Inc with $85 billion.
* The Fed ...view middle of the document...

* It announced purchases of up to $100 billion in debt obligations of mortgage giants Fannie Mae, Freddie Mac, Ginnie Mae and Federal Home Loan Banks.
* The Fed cut the key interest rate to near zero, Dec. 16, 2008.
* In March 2009, the Fed expanded the mortgage buying program and said it would purchase $750 billion more in mortgage-backed securities.
* The Fed also announced it would invest another $100 billion in Fannie and Freddie debt and purchase up to $300 billion of longer-term Treasury securities over a period of six months.
* The quantitative easing program, or QE1, concluded in the first quarter of 2010, with a total of $1.25 trillion in purchases of mortgage-backed securities and $175 billion of agency debt purchases.
What was expected
The Fed wanted to lower mortgage interest rates and increase the availability of credit for homebuyers to help support the housing market and improve financial market conditions.
What happened
Mortgage rates dropped significantly, to as low as 5 percent, about a year after QE1 started.
End of QE1
March 31, 2010
What the Fed did
* After completing the purchase of $1.25 trillion in mortgage-backed securities, $300 billion in Treasury bonds and $175 billion in federal agency debt, the Fed ended QE1.
* QE1 was initially open-ended. The Fed did not set an end date for the program until about six months out, as it slowed the buying pace.
What was expected?
Contrary to analysts' expectations, mortgage rates tumbled after the program ended.
What happened
Mortgage rates dropped significantly, to as low as 5 percent, about a year after QE1 started.

QE2 begins
Nov. 3, 2010 - June 30, 2011
What the Fed did
* The Fed continued to reinvest payments on securities purchased during the QE1 program.
* In addition, it began the purchase of $600 billion of longer-term Treasury securities.
What was expected?
The Fed said QE2 would help promote a stronger pace of economic recovery. Industry observers expected QE2 to keep mortgage rates low or push the rates lower.
What happened
Contrary to what was expected, mortgage rates spiked more than half a percentage point in a little more than a month after QE2 started. When the program ended, the 30-year fixed-rate mortgage was about 30 basis points higher than it was when QE2 started.

End of QE2
June 30, 2011
What the Fed did
* As previously announced, the Fed concluded its $600 billion bond purchasing program.
* QE2 was conducted at an even pace, and the end date was telegraphed from the start of the program.
What was expected?
When the program was about to end, some mortgage experts feared rates would rise.
What happened
Mortgage rates have tumbled since QE2 ended and have recently reached record lows.

QE3 begins
Sept. 13, 2012 to Dec. 18, 2013
What the Fed did
* The Fed is planning to buy another $40 billion in mortgage-backed investments each month until the economy...

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