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When does quantitative easing come into play?

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Central banks do not go over the money markets with a watering can and distribute funds according to gut feeling. Every measure considered by the monetary authorities must follow a specific objective. In the past, quantitative easing was not part of the central banks' "toolbox" for a long time. And in the financial crisis of 2007/2008, the ECB was still reluctant to use this tool.

As a measure, quantitative easing comes into consideration when other tools have already been exhausted. Scenarios can be:

  • low interest rates
  • deflation
  • weakening demand
  • a cooling investment climate¬†

could be. This list makes it clear that QE belongs to the group of monetary policy measures that tend to be used as a secondary measure. What does the application look like in practice?

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Quantitative Easing in the USA

Long before the ECB, the United States used QE as a monetary policy instrument. In response to the subprime crisis, which ignited in the US real estate market, the US central bank, the Fed, massively reduced the key interest rate. Subsequently, Quantitative Easing remained as an instrument after the reduction close to zero. The programme was launched in December 2008. In the first round of financing, the central bank pumped 600 billion US dollars into the market via mortgage-backed securities. Later, the whole thing was expanded by another 750 billion US dollars for mortgage-backed securities and 300 billion dollars for US Treasuries.

In a second step, the US central bank invested another 600 billion US dollars to purchase US government bonds. This package was spread over several months, each of which saw $75 billion flow into the market through quantitative easing. In September 2012, the Fed announced a third tranche of its quantitative easing measures. With a total volume of USD 85 billion per month, more liquidity flowed into the market than in the previous package. From the end of 2013, the monthly volume of bond purchases was continuously reduced.

In the context of the coronavirus pandemic, quantitative easing suddenly became an issue again for the Fed in the USA. First it was supposed to be about the purchase of bonds worth 700 billion US dollars. Shortly afterwards, the news broke that the central bank was planning to lift the cap. In the end, the Fed purchased securities worth an estimated 1.5 trillion US dollars as part of its bond-buying programme. But: As quickly as the volume of purchases in QE shot up, it went down again just as rapidly.

In the meantime, the Fed seems to have put away the "smoking gun". But the quick reaction to quantitative easing shows that the US monetary authorities will be ready at any time to put all their eggs in one basket again. Whether the Fed will have to adjust its stance depends primarily on how the markets behave in the coming months. At the moment, at least investors who used /downloadexness and shareholders seem to be taking the real economy out of their calculations.

The US is facing record unemployment, queues are forming at food distribution points - and some inner cities are still deserted. Nevertheless, the Fed does not seem to see any reason to go all out on quantitative easing again for the time being.