Forex broker analysts have been listening to it for so long now it seems like another economic term to consider when trading in any financial market. And so is the case with a lot of forex traders who are always on top of the page regarding financial news that impact their trading and profits.
Fed policies have a huge impact on the American Economy, which in turn influence the way the U.S dollar performs against other currencies in the forex broker market.With hints about another round of Quantitative Easing (QE) around the corner, questions about QE have multiplied, especially among market beginners.
“The costs of non-traditional policies, when considered carefully, appear manageable, implying that we should not rule out the further use of such policies if economic conditions warrant“, said Fed boss Ben Bernanke, during his Jackson Hole speech.
Of course Mr. Bernanke is referring to QE3, after the U.S economy throw some mixed results, according to the latest released data.
QE is a monetary policy tool that central banks use when they run out of room to cut interest rates. The way the central bank, or in this case, the Federal Reserve does this is by buying assets -usually financial assets such as government and corporate bonds- using money it has simply created out of thin air.
For many people, forex broker specialists included, QE is relatively new term and with good reason, as it was only coined by the Bank of Japan in 2001 after they took interest rates to zero.
“Quantitative Easing basically involves printing money to buy a variety of securities with the end goal of flooding the financial markets with cash or liquidity. Doing so increases the amount of currency in circulation, which reduces the value of the currency and boosts inflation“, says David Zervos, a senior economist at U.S investment bank Jeffries.
The Fed has announced several rounds of quantitative easing, which a number of studies suggest have helped, but with diminishing returns. One problem is that large numbers of businesses and consumers have been unable to qualify for loans, blunting the stimulation impact of lower rates.
The initial U.S quantitative easing program from November 2008 to May 2010 saw the Fed buy $1.75tn in debt held by mortgage providers Fannie Mae and Freddie Mac. A second round, called QE2, involved an additional $600bn. The now famous “Operation Twist” began in September 2011 with a pledge to swap $400bn in short-term loans for longer-term bonds, with an extension in June adding a further $267bn.
Bernanke has offered strong defense of his decisions, saying that “Evidence supports the conclusion that central bank securities purchases have provided meaningful support to the economic recovery, while mitigating deflationary risks”.
Still, it is unlikely for forex broker experts the Fed would back a further round of QE before the presidential election in November.
“The idea that the Fed would come out with unconventional monetary policy, such as credit easing seems to be a little bit of a stretch”, concludes Zervos.