What is quantitative easing (QE)

The English term for quantitative easing is Quantitative easing, or QE for short, which is an unconventional monetary policy tool. In quantitative easing, “quantification” refers to the creation of a specified amount of currency, and “easing” refers to reducing the pressure on banks’ funds. The specific form is that when the central bank implements zero interest rate or close to zero interest rate, it purchases treasury bonds and other medium and long-term claims in the open market, which increases the funds in the settlement account opened by the bank with the central bank and injects new liquidity into the banking system. In the central bank’s daily transactions on short-term government bonds in the open market, the government bonds involved in the quantitative easing policy are not only large in amount, but also have a longer cycle. Generally speaking, only when conventional tools such as interest rates are no longer effective, the central bank will take this extreme approach of “making something out of nothing”.

The role and impact of quantitative easing

Quantitative easing was first proposed by the Bank of Japan in 2001. At that time, in response to the economic downturn and investment recession, the Bank of Japan injected liquidity into the banking system by continuously purchasing public debt and long-term bonds when interest rates were extremely low. The level is always close to zero. By injecting liquidity into the banking system, banks are forced to lend at lower interest rates, thereby increasing the money supply of the entire economic system and promoting investment and the recovery of the national economy. It was the Bank of Japan’s decisive adoption of quantitative easing measures to actively increase the money supply that enabled the Japanese economy to recover in 2006.

The quantitative easing policy of the United States in 2008 was much more serious than the situation in Japan in terms of the background of the incident, the scale of implementation and the time span. In addition to the near collapse of the U.S. financial system, the shrinking credit market, the near exhaustion of liquidity, and the disappearance of market confidence, the outbreak of the European debt crisis represented by Greece has greatly deteriorated the international economic environment. Three rounds of QE were launched, which lasted for six years, and the global financial market is still under the role and influence of QE.

  1. interest rate. The Federal Reserve promised to maintain low interest rates, leading to a decline in market real interest rates, stimulating the increase in investment and consumption of enterprises and residents, and promoting economic recovery.
  2. Asset structure adjustment and rebalancing. Through asset replacement and rebalancing, the Federal Reserve converts the less liquid assets in the hands of financial institutions (mortgage-backed bonds, agency bonds, commercial paper and other low-grade bonds) into demand accounts, cash and other highly liquid assets, prompting financial institutions to be active Use it for loans, bonds or stock investment to further stimulate enterprise production and household consumption.
  3. Inflation expectations. The expansion of the Fed’s balance sheet has caused the expansion of the base currency, and the large-scale currency injection has caused people to worry about future inflation. When the policy interest rate is promised unchanged, the increase in inflation will lead to a decrease in real interest rates, and the reduction in the cost of corporate funds will lead to consumption and investment. The rise will ultimately affect the growth of output and employment.
  4. Credit recovery. The Federal Reserve purchased a large amount of US dollar assets to inject capital into the financial market, prompting the recovery of the credit market, supporting enterprises and residents to increase investment, and ultimately returning output and employment to the growth channel.

How quantitative easing (QE) affects the foreign exchange market

The depreciation of the U.S. dollar due to the growth of the money supply in the U.S. is of course beneficial to U.S. exports, and the depreciation of the U.S. dollar makes the precious metal gold and silver prices higher; at the same time, fluctuations in U.S. interest rates and the U.S. dollar exchange rate also affect international capital flows and import and export trade, which makes its monetary policy The effect spills over to the countries with which it has economic contacts and has an impact on the global economy. The QE implemented by the United States is the largest attempt in the history of human economics. While promoting the economy, it also made asset prices rise significantly. Specifically,

In the QE1 stage, the US dollar index (black) mainly fell, while spot gold (yellow), the S&P 500 index (red) and the EUR/USD (blue) rose to varying degrees. Among them, the US stocks represented by the S&P 500 rose rapidly. Recovered from the panic of the subprime mortgage crisis, the curtain of a ten-year bull market was opened with the guarantee of sufficient liquidity. Gold and the euro started a new wave of rising under the depreciation of the US dollar, and the foreign exchange market significantly increased turbulence.

QE2 lasted for a short time. The Fed continued to put US dollars into the market, the US dollar exchange rate continued to depreciate, and gold and the euro continued to rise.

QE3 is the longest time and is also the stage where the foreign exchange market has experienced a major reversal. During the period, the US dollar began to stabilize and rebound. The main reason is that the US economy is gradually improving, and the Fed will step by step withdrawing from quantitative easing; while the European economy was troubled during the same period, and the US The trend of dust, economic performance and policy gaps made the US dollar turn to offensive, so that gold and the euro fell sharply at this stage; the improvement of the US economic environment has attracted continuous flow of funds to US dollar assets, and US stocks represented by the S&P 500 have risen dramatically.

In conclusion

The quantitative easing policy not only reduces the borrowing costs of banks, but also reduces the borrowing costs of enterprises and individuals. The original intention of central banks to implement QE is to hope that the economy will recover quickly, but the increased amount of liquidity has also had a huge impact on the financial market. The foreign exchange market allows global capital to circulate effectively, and economic globalization has strengthened the media role of the foreign exchange market. Through the foreign exchange market, the stock market, bond market, futures market, and even the real estate market are connected, and the foreign exchange market is therefore more volatile.