Quantitative easing (QE) is an unconventional monetary policy employed by the central bank to stimulate the economy through the increase of money supply with the purchase of financial assets from commercial banks. This is an attempt to reduce the long-term interest rate and encourage spending and lending. The Federal Reserve had released 3 rounds of QE since the financial crises in 2008. QE1 seemed to be acting as a “giant confidence boost”, contributing to market confidence with the rise of inflation and stock prices. However, the effects appeared to wear off in QE2 with decreased growth in stock prices and increased risks in creating asset bubbles.

Views towards QE3 varies widely as it aims to buy more mortgaged-backed securities. Whilst markets welcomes QE3 to boost economic growth and tackle unemployment, there are worries that as it reduces the profits of banks, they would be reluctant to lend money, thus not achieving the desired effects. When implementing policies, governments should consider its impacts on all aspects of the society – does the welfare outweigh the loss? For example, QE harming individuals dependent on bank savings and pensions; as well as placing inflationary pressure and risks of over-heated housing markets in foreign economies.

Referenced Articles: http://www.washingtonpost.com/blogs/ezra-klein/wp/2012/09/13/qe3-what-is-quantitative-easing-and-will-it-help-the-economy/

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