Quantitative Easing in the USA

Quantitative Easing in the USA

Tim Hall

30 years: Debt capital markets

In this video, Tim describes the response of the United States to the Great Recession of 2007-2009. He explains the response of the Federal Reserve and the impact of their monetary stimulus.

In this video, Tim describes the response of the United States to the Great Recession of 2007-2009. He explains the response of the Federal Reserve and the impact of their monetary stimulus.

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Quantitative Easing in the USA

10 mins 2 secs

Overview

The Federal Reserve unleashed an unprecedented amount of stimulus and reforms, mainly equity injections into nine systemically important “too big to fail” banks, and toxic asset funding at the onset of the financial crisis which restored the US economy to a firm footing, and eventually to growth. This is evident as Nominal GDP in the US increased from $14.6tn in 2009 to $20.8tn in 2018.

Key learning objectives:

  • Outline Fed's initial response to the financial crisis

  • Understand how the Fed unwind QE

  • Understand how successful were the three programmes of QE

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Summary

How did the Fed initially respond to the financial crisis?

  • The Fed increased short-term borrowing rates in an attempt to take the heat out of risky consumer debt products. However, this reversal occurred too abruptly, causing liquidity and funding in the bank market to seize up
  • They reversed course again and lowered the interbank borrowing rate from its peak of 5.25% in September 2007 to effectively 0% by the end of 2008

What was the impact of this policy response?

  • The worsening US economic situation, coupled with growing non-performing loans at a number of banks, and severe losses at several institutional investment firms, caused many banks and investment companies to lose access to capital markets
  • As confidence eroded, the US economy spiraled downwards rapidly, exposed to a variety of risks

What policies were implemented following the collapse of Lehman Brothers?

  • Coordinated fiscal policies
  • Troubled Asset Recovery Plan (TARP) was implemented to buy toxic assets from banks
  • Recapitalising the “too big to fail” banks in the US. This was funded by the Emergency Economic Stabilization Act of 2008

What did the first round of QE (QE1) consist of?

This started in November 2008 and was extended in March 2009. This involved the purchase by the Fed of $1.75 trillion of:

  • Mortgage-backed securities
  • Agency debt
  • US Treasuries

What did the second round of QE (QE2) consist of?

This started in November 2010 and continued until mid-2012. This involved the Fed purchasing $600 billion of:

  • Longer-dated US Treasuries
  • Mortgage-backed securities
  • In September 2011, the Fed announced it would buy an additional $400 billion of long-dated US Treasuries, 5-30yr maturities

What did the third and final round of QE (QE3) consist of?

This started in September 2012 and completely ended in October 2014. This involved the Fed:

  • Purchasing close to $40 billion of mortgage-backed securities each month
  • This overlapped with ‘Operation Twist’ in QE2, meaning a total of $85 billion of securities each month were purchased
  • In mid-2013, the Fed announced that ongoing purchased would be tapered - or gradually reduced each month

How successful were the three programmes of QE?

  • The policy responses meant liquidity concerns around financial institutions more or less disappeared early in the recovery cycle
  • This in turn, resulted in the restoration of consumer confidence and business investment
  • The three rounds of QE over six years increased the balance sheet of the Fed from $800 billion in 2008 to nearly $4.5 trillion by 2014

How did the Fed unwind QE?

  • The Fed began the reversal of QE - or ‘Quantitative Tightening’ (QT) - at the beginning of 2018. Since the $50bn/month balance sheet reduction started in 2018. The Fed’s balance sheet has been reduced $500tn to $4tn, which is approximately 20% of GDP
  • The Fed announced in February 2019 that it intended to stop its reductions in the balance sheet for the remainder of the year

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Tim Hall

Tim Hall

Tim has nearly 30 years of experience in the international capital markets at major global institutions and has worked both on the buy-side and the sell-side. He has worked with numerous companies, banks and governments in developed and emerging markets on investment grade and high yield bond issues, from straight-forward to very complex acquisition/leveraged financings. Tim has also been on the board of a UK “challenger bank.” Tim has an MBA from the Wharton School, and is a CFA.

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