Analysis On The Fed’s Quantity Easing Policy

The Federal Reserve cut down federal funds rate ten times to stimulate the economy after the crisis broken out in August007.Because of the destruction of traditional monetary policy transmission channels, the effects of policies achieved was very disappoint. At this point, the interest rates have fallen to a very low level, so there is no space to cut interest rates again. In addition, the marginal effect of the conventional monetary policy is also diminishing. Therefore, the Fed have to change ideas, a new way was born.From the theoretical foundation, transmission channels, the ultimate goal of these two monetary policies, there are more common points then differences. From the view of common points, their all are used in order to stimulate the economy. However, there are some differences between these two policies, such as short-term goal, mode of operation, tools and pathways.In my opinion, there are many reasons for the Fed to launch out this special policy. Firstly, the economy of American is extremely weak after the financial crisis, although the Fed took a super-loose monetary policy immediately. In addition, the marginal effect of conventional monetary policy is becoming less and less. Secondly, the huge budget deficit makes it difficult to introduce the proactive fiscal policy. Thirdly, it can make other economies, to pay for the U.S. economic recovery to some extent through the junk bills. Fourthly, the successful experience of Japan provided the Fed much experience.We studied the specific practice of QE in the third part of this paper, and we can find that they have much feature in common. Firstly, each tool is used for a new problem. Secondly, they are all directly and radically. Thirdly, the tools are new, the level and channel are diversify. Fourthly, they change not only scale but also structure of the Fed balance’s sheet.Then we carried out an empirical research on the impact of the credit market risk premium level by the cut interest rates policy. From the comparative study, we can find the policy is effective before the crisis, but not effective after that time. This may be result of two reasons, the marginal effect is decreasing, or the policy pathway is damaged. No matter which reason it is, it means that the policy tools can ease the liquidity situation only if the quantitative easing monetary policy can reduce the risk premium of the credit markets effectively. In this view, we carried out an empirical research on the innovative tools.The result showed that the CPFF, PDCF is significant effective but other tools are not significant.Otherwise, we studied the possible adverse effects of this quantitative easing monetary policy. First, it may trigger global inflation and lead to the crisis of asset price bubbles. Second, it compressed the monetary policy space of the emerging economies. Third, the Fed’s independence was challenged. Fourth, the moral hazard of financial institutions increased. Fifth, it is difficult to exit for the quantitative easing policy.Because of the negative impact of the quantitative easing policy, we researched the exit strategy in the fourth part.Based on the above studies, we obtained the following main conclusions. First, these two policies are not antagonistic, but complementary. The quantitative monetary policy is based on the traditional monetary policy and deepened and strengthened the implementation of the effect of the former. Second, this monetary policy repaired the financial markets function by reducing the risk premium level of the U.S. credit market, but it also brings a lot of negative impact. Third, this policy can’t reduce U.S. unemployment rate significantly. Third, the launch of the monetary policy is a "radical" behavior, but the exit will be a long process. Fourth, the implementation of monetary policy depends on the support and cooperation of other policies, and also need the public’s trust.