Sunday, March 13, 2011
An explanation of the US Fed’s quantitative easing
Quantitative easing is an asset swap. The Fed creates electronic credits and swaps them with existing financial assets. If the Fed is buying government paper, it is essentially trading one government liability for another, swapping a demand deposit electronic credit for a longer-dated government liability. So QE2 is equivalent to issuing treasury bills. The Fed had intended to lower interest rates via the lowered risk premia. To date, the Fed has lowered risk premia.