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The Fed Launches QE2 to Further Drive Down Interest Rates

POSTED ON BY

At the end of the FOMC meeting, the Fed announced plans for additional stimulus, aka Quantitative Easing 2. Here's an excerpt from the Fed's press release that describes the plans for QE2:

To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to expand its holdings of securities. The Committee will maintain its existing policy of reinvesting principal payments from its securities holdings. In addition, the Committee intends to purchase a further $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month.

The rest of the press release is similar to past ones. There is no change in interest rates, and they continue to say the same line of "exceptionally low levels for the federal funds rate for an extended period." The only vote against this policy remains Thomas Hoenig. The press release included Hoenig's objections:

Voting against the policy was Thomas M. Hoenig. Mr. Hoenig believed the risks of additional securities purchases outweighed the benefits. Mr. Hoenig also was concerned that this continued high level of monetary accommodation increased the risks of future financial imbalances and, over time, would cause an increase in long-term inflation expectations that could destabilize the economy.

This AP article via CNBC has a good overview of what QE2 is suppose to accomplish and what could go wrong. QE2 is suppose to lower interest rates even more which in theory is suppose to encourage more borrowing and spending by both consumers and businesses. It's also suppose to encourage individuals to invest in stocks and encourage businesses to invest in new equipment. All of that should in theory improve economic growth.

The AP article also points out what problems that QE2 may cause. One that Hoenig mentioned is the risk of financial imbalances or bubbles. Another problem is the falling dollar. As the article mentioned, it causes prices to rise on what we buy from other countries. Finally, it's quite possible that QE2 won't work. If two years of record low interest rates haven't helped enough, perhaps the nation's economic problem can't be fixed by monetary policy.

Update 11/04/2010: Bernanke responds to QE2 critics in a Washington Post op-ed: Aiding the economy: What the Fed did and why.

 

Future FOMC Meetings

If you want an idea about what the market thinks regarding when the Fed will start hiking rates, check out this CME Group FedWatch tool. It shows you the probability of rate hikes in the future FOMC meetings based on the 30-Day Fed Funds futures prices. The probability of a higher Fed funds rate by next June is shown to be only 3.2%. That's down from 17.9% after the last Fed meeting in September. The chance of a rate hike by next November is only 18.6%.

The last FOMC meeting for 2010 is scheduled for December 14, and the first meeting for 2011 is scheduled for January 25-26.



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Comments
36 Comments.
Comment #1 by Anonymous posted on
Anonymous
The Fed is ruining our economy.  It's time to end the Fed!!!

15
Comment #2 by viking posted on
viking
Wouldn't that cause outflow of money from the US to countries with higher rates....?

7
Comment #3 by jrc (anonymous) posted on
jrc
The fed continues to artificially hold down interest rates rewarding those people and companies who have acted irresponsibly. At the same time it penalizes savers who have spent their lives accumulating funds that would hopefully provide enough earnings to ensure a safe retirement.  Thanks alot Ben.

27
Comment #5 by Anonymous posted on
Anonymous
The Fed needs to spend more attention to Main Street and less to
Wall Street.  I've spoken to several small business owners (profitable) that would like to borrow and can't get loans.

6
Comment #6 by mrvirgo posted on
mrvirgo
Welcome to the Weimar Republic II.  When the economy collapses, these jerks will be the first to deny it was their doing.

7
Comment #7 by Anonymous posted on
Anonymous
We all know by now Bernake is an a@@ who is doing all this for his ego and as Obama's puppet. No one has ever talked about his grades at MIT! Why print 600 billion $$$$ if it won't do anything besides cause food prices to go up in 2 years . It must make the man feel like a king! Why not just make peole pay the banks interest!!!!!We actually now have negative interest rates by the time you figure in the QE2 stimulus. You knw we can always bring interest rates up BUT we can not go back and change the fact we printed all this money. 

9
Comment #8 by Anonymous posted on
Anonymous
This  wizard (Uncle Ben) actually admitted today in so many words that he WAS doing all he could to keep the market UP. This slime ball is killing savers while trying to force desperate people looking for some sort of income to supplement this NO COLA SS into this market. All to the delight of the stock pushers at CNBC and the booya clown, while he's makin a killin with all his insider info and the help of uncle Ben.

16
Comment #9 by willtlor (anonymous) posted on
willtlor
The Administration has basically set the stage for this bubble-blowing maneuver on the part of the Fed by the Administration's capitulation to Wall Street in dealing with the Financial Crash (a more fitting term than "recession") that happened before the hangover for too many Americans who over-leveraged and overspent for too long and are now faced with a "morning-after" that's continued to endure.  Had the President not been so easy on Wall Street we could have done a lot more to get the hangover effect over with, however, by not doing what was needed to accomplish the job, the Administration simply put the Fed in the unenviable position of being the culprit if the economy deteriorated further--still a real risk--so this monetary maneuver is what we got. In the case of assets and stocks in particular, their trading (not IPOs) doesn't contribute to make real investments to create jobs in the way that savings do, and when the downside of this type of asset becomes a reality, the economy is harmed. We need to recover our manufacturing base and start employing people again at other than low wages as quickly as possible, and we're not going to get there sooner rather than later and stop going from hangover to hangover unless we make some structural changes in the economy .  Tax policy changes won't do it and spending cuts definitely won't do it. We need the structural change that is part of an industrial policy..

3
Comment #10 by dave (anonymous) posted on
dave
They are calling this QE2... I think TITANIC would be a more appropriate name.

8
Comment #11 by CandyCane posted on
CandyCane
Chuckle.... good one, #10, and unfortunately for our country..  OH SO TRUE!  It still ceases to amaze me that in an election year as big as the one we just had, why none of the candidates ever brought up this situation. If they had, a lot more people would have listened and supported them.  Why is there only one dissenting vote on the Fed Board?  Have none of the other members ever heard of the law of diminishing returns???  Why is the failed logic that if QE policy did nothing to turn things around, that QE2 would somehow miraculously work using the same tactics?  I live in an area supposedly hit hard by double digit unemployment and a landslide of foreclosures, but you wouldn't know it by looking at the vehicles driving on the roads and the shoppers in many of the retail establishments, even though they are more likely now to shop at Walmart and Target. A lot of the excuses for the Feds action are just blowing smoke where there really isn't any firs. I agree with others that most of these policies unfair to savers are to correct for the years of abusive conduct by financial institutions and Wall Street, and to underwrite the stupidity of people who were spending and borrowing WAY beyond their means. I wonder what would have happened if the Government hadn't stepped in and bailed out these culprits???   Would we have been in any worse shape financially than we find ourselves right now.... I doubt it.

4
Comment #12 by Anonymous posted on
Anonymous
Intead of ignorantly ****ing and ranting about what the FED does, I'd suggest all of you take more economic classes. I majored in ECON and judging by the total lack of knowledge of these posters on here, the problem is not the FED at all but the ignornace of the general public regarding how an economy works.

I'll explain in very simple terms. When we're in such a recessoinary period, it is imperative to lower rates, not tighten them. It's too bad for us savers--I'm a saver too--but it's necessary to jump start the economy.

The argument that it hasn't worked for 2 years, so lets tighten is so fracking stupid. That's like saying: oh, the fire is so big and we've already pour water on it for 2 hours but to no affect, so lets stop pouring water on it. Does that stop the fire? Of course not. If the economy is in a recession, we do whatever is necesarry to jump start it so that the economy grows. We don't increase rates to restrict/constrict growth even more.

Stop thinking of yourselves only and think about the greater economy.

9
Comment #13 by Anonymous posted on
Anonymous
The problem with all the economy majors is that they were all taught the same things and what works in good times. Now these same cookie cutter people are running the Fed.

As a business owner, I have no reason to borrow  or take chances because I know interest rates are not rising anytime soon. Now if I thought rates were going to go up....

9
Comment #14 by Anonymous posted on
Anonymous
We are told by our rightwing friend that "printing money is Obama's agenda".

If so, why there isn’t a single newly elected GOP member of the house ready to criticize the new 600 billion bank subsidies that the feds announced yesterday.

We are told that "the GOP is the party of wars". If so why didn't Obama use his presidential power to order the immediate withdrawal from Iraq and instead announced a "end of combat" which is essentially a renaming of the same war.

Those questions beg for the obvious conclusion that while we can choose our elected leaders, we can not choose the policies of our country.

You may be rightwing or leftwing and you may elect a leader "packaged" to you as such, this is our "democracy". The one thing you get no say on is whether we will have wars or not or whether we will distribute more of your tax dollars to Wall street.

 

Was that the intent of this country's founders?

2
Comment #15 by willtlor (anonymous) posted on
willtlor
Anoymous #12--You use a pretty broad brush in your criticism of all the other posters and you're not he only one to have had an education in economics.  You're missing an important pont: OBVIOUSLY, interest rates SHOULD be lowered when the economy has suffered a downturn.  The issue isn't that savers are complaining about interest rates being low PER SE, many also realize, as you apparently don't that the savings of investors, over the longer run, are an engine that creates real investment in an economy, unlike more speculative "investments", and thus, many savers are objecting to the overuse of policies that are simply moving the country from bubble to bubble.  The analogy that applies better than your firefighting one is one of treating the symptoms of a medical problem (applying the treatment DU JOUR) rather than the underlying cause. Unless this country gets back to manufacturing lots of goods, and starts reemploying its citizens instead of dealing with an economy based so heavily on financial products we are not going to be where we want to--and SHOULD--be.  Savers who seek policies that are best in the longer run are merely trying to see the country move away from overrelying on dealing with the symptoms rather than the underlying disease.

6
Comment #16 by Anonymous posted on
Anonymous
So, why are folks blaming those who are trying to fix the problem for the problem?

Eight years of slowly ruining our economy is not fixed in two.

3
Comment #17 by Anonymous posted on
Anonymous
In addition to all the TARP $$$ they got, banks continue to get what amounts to nearly interest free money at the  expense of the saving public.  Banks turn around and lend the money that costs them so little at much higher rates, earning an enormous spread.  The Fed has essentially engineered an enormous wealth transfer from savers to banks.  No wonder the banks could repay their TARP funds - they did it on the backs of savers. 

6
Comment #18 by Anonymous posted on
Anonymous
If they really wanted to help the economy why give the money to bankers and hope the bankers will give loans.

Why won't the feds open a consumer bank which will give conforming mortgages and business loans to people directly?

Why do I need to go to BofA to get a loan from money BofA is getting for free from me the tax payer? And why should the CEO of BofA get paid millions to give me a loan with the money we the tax payers gave him for free?

 

How hard is it for a bank to make money when they get to borrow for free, do not pay much on deposits and charge me directly or via the gov;t financing the national debt?

Sure they will make money. My 5 year old could make money runing that bank and he would not ask for any bonus above his negotiated % 5 million / year!!

 

What a joke this system is.

8
Comment #19 by Anonymous posted on
Anonymous
To Anonymous - #17,

Banks repaid or are repaying TARP with free money they can borrow from the FEDs.

B of A borrowed 10 billions from the FEDs at 0% and from QE1 money, then sold 39 billions of worthless real estate paper as security to the FEDs which in effect will be converted to taxpayer liabilities.

QE2 will bail out AGAIN the banks who are stacked with worthless paper and they can convert for profit by unloading it to us (people) via FEDs manipulations and printing money.

Like always, the people get whacked and are losers no matter what the FEDs are doing.

 

6
Comment #20 by lou posted on
lou
To: poster 12   I think what most people are objecting to is the long-term effects QE. Sure you can print trillions of dollars now to monetize our debt and that may or may not work to revive the economy temporarily; but if two years from now the the FED has trashed the dollar, commodity prices have increased astronomically and investors throughout the world refuse to buy US govt securities because they know they are being paid back with devalued dollars, the crisis that will ensue will make the last one look relatively minor in comparison. If you kill the patient by treating the disease, what have you really accomplished. Remember nothing in life is free and the FED printing money like the Weimar Republic will have consequences.

10
Comment #22 by Anonymous posted on
Anonymous
Bernanke plays with politics by trying to implement the Obama's idea to export ourselves from recession.

How naive and childish Government we have. We don't have industries to compete with China and rest of the world. USA salaries are at least 10 times higher than most of the world.
Our products are for internal use only and can not compete abroad.
 
It will never happen, hear that Democrats and Bernanke, printing money is discrediting and demeaning and shows how little you know about our economy and the current problems we have. Elementary economic classes need to be given to the people in power to at least know what they are doing or why and the consequences of doing it.

 

4
Comment #23 by willtlor (anonymous) posted on
willtlor
To the "We just can't compete anymore" crowd: I recommend a web search for "What would Dieter do?" a recent piece by Ed Gerwin originally in the Wall Street Journal. Our economy is 4X larger than Germany's and they export MORE manufactured goods than us and and their 2nd quarter GDP growth was NINE percent!  German salaries AREN'T so low, and it's ridiculous not to try and go to work ASAP to expand our manufacturing base for exports by working on the partnership between government, business and labor that's characteristic of German export manufacturing. Gerwin mentions "niche" products produced by German firms for export, e.g., sunroofs made in Germany for export. We could make this type of product and lots more like it in all sorts of small businesses in many cities and towns in the rustbelt and elsewhere and export these quality products just as Germany does. It will take effort, imagination, work and time to do this but if we don't do this we will simply be living in an economy with too strong a financial sector that encourages overborrowing and overspending by consumers, too weak a manufacturing base, and now we are seeing what can happen when that runs its course.

3
Comment #24 by Anonymous posted on
Anonymous
To willtlor - #23,

You can not compare Germany with USA, why you ask, well for starters, Germany labor is not unionized in same fashion like USA, there is no minimum wage (wages are flexible and very low in certain manufacturing sectors, 90% are foreign labor).
Second, Germany manufacture very specialized and high tech products for export markets only.
Third, their chemistry industry is second to none. They hold patterns on thousands of chemicals that the world need and use on daily bases.
Fourth,  their manufacturing laws are very loose and flexible and are not restricted by EPA
like we are.
Fifth, their leaders promote their products every chance they get to other countries and always are on lookout for more deals with the rest of the world.
Our leaders are selfish, self absorbed in power grab, wars, people control, running deficits to cover inabilities to govern and are focused on number of other irrelevant issues. Wasted time and opportunities are normal in our Government, you don’t see that in Germany., therefore,USA and Germany can not be compared when it comes to manufacturing, Germany wins by at least 100 points on all relevant issues.

18
Comment #25 by Anonymous posted on
Anonymous
The FED is a puppet out to support banks and their bonues and could care less about the prudent saver.  This truly is a ponzi scheme going on here.  I used to be against buying gold, silver and commodities but now will be buying on all pullbacks.  The dollar is now trash because of the FED   

2
Comment #26 by Anonymous posted on
Anonymous
I strongly agree with #24, well said, also like to ad that Bernanke is flapping around like a headless chicken, pumping more liquidity in a system that is overflowing with printed money.
His credibility is zero in the eyes of the foreign Governments and is discrediting USA at every level of money matters. He should resign and stop the nonsense policy of printing money and his clewless policies of trial and errors.

4
Comment #27 by willtlor (anonymous) posted on
willtlor
Anonymous #24. Thanks for your post re Germany:  You brought out some excellent points and the article I referenced is probably on the overly-optomistic side, which brings up the critical thing this country faces. If decent-jobs aren't forthcoming relatively soon for the current huge number of unemployed, workers employed only part-time and seeking full-time employment, workers that are under-employed, and those formerly employed and no longer looking for work (i.e., "discouraged" and not included in the unemployment statistics), what is our economy going to look like at least for the next several YEARS? I'm retired, don't have an employment issue and am a saver , however, regardless of one's background in economics--and I believe mine is a good one--this issue has to be the largest issue the country has faced even going back to the '30s, because in the 30s there was much more opportunity for particular federal actions than there is today. Following Tuesday's elections, there simply is no chance for a national fiscal policy to deal relatively quickly and effectively with unemployment, and the effectiveness of federal tax decreases or continuation of the Federal Reserve's present monetary policy are decidely NOT silver bullets. The most logical alternative I can think of seems to be for states to take measurs ASAP to try to implement innovative policies and programs at the state level to deal with unemployment for residents of the state.

2
Comment #28 by Anonymous posted on
Anonymous
quote from ben's reasoning  "will work its magic by lifting stock prices and cutting borrowing costs."


This means nothing to me, I have NO stock, I don't want a loan.

What these BS voodoo CPI numbers and 0 interest does is make me hunker down and conserve even more. As a retiree with now 2 years of no cost of living, and getting nothing on my savings I scraped together after years of living below my already low means all this crap is just more pilled on s**t.

BTW: I'm wondering how many more trips around the country that one guy is making to open more "competitive" accounts for an extra  .10% interest, smirks

7
Comment #29 by Anonymous posted on
Anonymous
to #28:

 

who's fault is that you made wrong investment decisions?

1
Comment #30 by Anonymous posted on
Anonymous
To willtlor re state creating jobs.
This is the problem with the states:
a) They got used to receiving free money from the Obama admin. and no longer are keen to balance their budgets.
b) The unions are prohibiting to fire state, local, county or city workers.
c) Public servants morphed into spoiled brats and demand high salaries, pensions, free health-care and other perks.
d) To accommodate the above , states are in no position to hire or fire and they are technically broke and could not care less for the private sector.
e) Some states must raise  taxes to survive or cut on the entitlements and these are job killers.
f) Let say the money will be available for start up companies from private investors and the banks, it takes 1-3 years  from project on paper  to final product. If the product does not sell at the break even point or above, the investors and the banks will pull back and effectively close the business. (I’m not talking about service jobs here)
g) The revenue to the states comes mostly from the sales taxes and property taxes and not from manufacturing jobs and therefore, the states stay away from promoting manufacturing. (I’m talking about the states without income tax or very small state income tax)

To summarize the above, there is no incentives for the state to get involved into creating jobs, because the liabilities outweigh  the benefits. For every factory built, requires the state to provide the infrastructure like roads, utilities,  drainage, traffic control, education and so on and then to maintain all of the above at a great cost to the taxpayers , which at the end will cost more money then not to have the factory on first place.

11
Comment #33 by Anonymous posted on
Anonymous
This guy Ben Bernanke, where on earth he got his diploma, in Zimbabwe?

Come on, elementary knowledge says you never do that unless you plan to pull the printed money back within few months.

Can anybody tell me how to nix him from power?

3
Comment #34 by lou posted on
lou
It's frightening how much power a few men have to utterly destroy our greatest asset: US dollar. It took centuries to create the greatest store of value in the history of mankind, and it may only take a few years for a few individuals with unchecked power to destroy it. I propose that Congress should consider impeaching Bernanke, if it is possible.

1
Comment #35 by Derren (anonymous) posted on
Derren
Banking Guy,  Washington Post article about the FED is biased to benefit Ben Bernanke and the Liberals (Socialists) who need the money to buy more leaches (votes) for 2012 election.

2
Comment #36 by Anonymous posted on
Anonymous
How do you wipe out $15 trillions of debt. print $15 trillions of uncovered or accounted for dollars.

Devalue the dollar to Zimbabwe level and proclaim no COLA or inflation exists, simple Huh!

Naive Bernenke is defending his wild idea of printing money by saying it is good for the world and America, idiot!

1
Comment #37 by Anonymous posted on
Anonymous
Quantitative easing = Qualitative fall = Worthless Dollar
Did Obama gave the idea to Bernanke?

5
Comment #38 by Anonymous posted on
Anonymous
Everything we worked for, saved and accumulated in our life time, is being taken away (stollen) in front of our very own eyes. QE2 is the beginning of the end of the Dollar as we know it, thanks to the megalomanic, drunken from power, incompetent Bernanke. 

6
Comment #39 by Anonymous posted on
Anonymous
Banking Guy,

By removing posts ftom this blog, you will lose lots of readers and followers from your web site.

You already lost me. I hope the readers will get chance to read this by the time you remove this post too.

Good luck!

1
Comment #40 by marcus anthony bynum (anonymous) posted on
marcus anthony bynum
its good that the gold rush came up in iraq so now the gold rush have to come up in the u.s....

1