What is QE3 or Quantitative Easing 3?

Updated: Monday, September 2, 2013, 15:15 [IST]

'QE3' is the third-round of quantitative easing that was announced by the US Federal Reserve last year in order to stimulate or revive the US economy that had been hit hard by the sub-prime crisis in the mid 2008. Prior to QE3, the central bank of the US economy announced quantitative easing in the year 2010. So the question is what actually is quantitative easing?

Quantitative easing is an unconventional monetary policy that is implemented by central banks for stimulating or reviving the economy when standard monetary policy fails. Under, the QE programme, central bank of a nation purchases some specified amount of financial assets from banks as well as other financial institutions to infuse pre-determined liquidity into the system.

The process is however different from the usual scenario wherein the central bank of a country purchases short-term government bonds to maintain interest rates at levels that would trigger growth in an economy. Typically, QE adds to the reserves of the banks and pushes the price of the assets bought upwards, which then lowers their yield.

Further, QE is known to create inflation and devalue a nation's currency as more of it is made available. Consequently, implementation of QE goes against the currency and proves to be positive for assets such as gold considered to be hedge against inflation and devaluation. So, addition of extra money into the system through bond buying programme has been criticized by certain central banks, including Germany's Bundesbank that witnessed hyperinflation between World War I and World War II.

How US Federal Reserve System implemented QE3?

Federal Reserve System, which is the central bank of the US, implemented QE3 by the purchase of mortgage-backed debt and treasury instruments. The purchase of mortgage-backed debt securities was done in the hope that lower cost of borrowing would uplift the struggling housing sector in the country.

Why is QE3 in talks currently?

QE3 is in countless talks currently as the US Federal Reserve system is considering tapering of its third QE programme. The tapering of the programme would result in less liquidity in the global system that would impact the global markets considerably with more pronounced effect on emerging markets' currency and stock markets.

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