Quantitative Easing (QE) is an ugly name for a simple idea. Central banks buy long-term government bonds with newly printed money. This raises the bonds’ prices, lowers their yields and provides a helpful boost to growth when central banks’ main tool, the short-term interest rate, is close to zero.
There is plenty of dispute over whether QE works, but not over who should be doing it: the central bank, obviously. Yet is it so clear-cut?
In 1961, to lower long-term rates the administration of John Kennedy persuaded the Federal Reserve to co-operate with the Treasury in selling (shorter-term) bills and using the proceeds to purchase (longer-term) bonds. By altering the supply of different types of debt, the idea was to “twist” the yield curve. This came to be known as Operation Twist after the early 1960s dance craze sparked by Chubby Checker, a singer whose views on QE are not known.
JFK and quantitative easing
Twisted thinking
Government debt-managers may be undermining quantitative easing
http://www.economist.com/node/18486271?story_id=18486271
The Federal Open Market Committee concluded its September 21, 2011 Meeting by announcing the implementation of Operation Twist. This is a plan to purchase $400 billion of bonds with maturities of 6 to 30 years and to sell bonds with maturities less than 3 years, thereby extending the average maturity of the Fed’s own portfolio. This is an attempt to do what Quantitative Easing (QE) tries to do, without printing more money and without expanding the Fed’s balance sheet, therefore hopefully avoiding the inflationary pressure associated with QE. This announcement brought a bout of risk aversion in the equity markets and strengthened the US Dollar, whereas QE I had weakened the USD and supported the equity markets. Further, on June 20, 2012 the Federal Open Market Committee announced an extension to the Twist programme by adding additionally $267 billion thereby extending it throughout 2012.
On September 13, 2012, the Federal Reserve announced a third round of quantitative easing (QE3). This new round of quantitative easing provided for an open-ended commitment to purchase $40 billion agency mortgage-backed securities per month until the labor market improves “substantially”. Some economists believe that Scott Sumner’s blog on nominal income targeting played a role in popularizing the “wonky, once-eccentric policy” of “unlimited QE”.
The Federal Open Market Committee voted to expand its quantitative easing program further on December 12, 2012. This round continued to authorize up to $40 billion worth of agency mortgage-backed securities per month and added $45 billion worth of longer-term Treasury securities. The outright Treasury purchases as part of the augmented program continued at a pace comparable to that under “Operation Twist”; however, the Federal Reserve could no longer sell short-dated Treasury securities to buy longer-dated ones since they had insufficient holdings of short-dated Treasuries.