Under Ben Bernanke’s direction, the Federal Reserve is starting a fresh phase of monetary policy sometimes known as “QE3 Incognito.” Aiming to boost the economy while negotiating a convoluted and unpredictable terrain, this strategy contains many of the same traits even though it is not designated as a third round of quantitative easing (QE3).
This reduces long-term interest rates, promotes lending and investment, and increases economic development.
QE3 Incognito: A Methodical Approach
Although the name “QE3” has been avoided, the Fed has used numerous techniques somewhat similar to past rounds of quantitative easing:
Operation Twist
This is the Fed’s short-term Treasury securities sales program, in which the proceeds were used to buy longer-term Treasury bonds. This flattened the yield curve, reducing long-term interest rates and changing the short-term rates relatively little.
Extended Balance Sheet
Since the first QE rounds, the Fed has maintained a much-enlarged balance sheet. However, long-term interest rates are nevertheless under constant downward pressure from this continuous liquidity presence in the financial system.
Forward Guidance
The Fed has given unambiguous direction on its future monetary policy course, indicating that interest rates will stay low for a long time. This forward direction promotes borrowing and investment and serves to ground long-term interest rate expectations.
Traveling Unknown Seas
Issues about inflation, the continuous recovery, and the possible influence of world events have made a more complex and adaptable strategy necessary. Reflecting this changing approach, QE3 Incognito helps the Fed to keep accommodating monetary policy while closely observing economic conditions and modifying its actions as necessary.
Summary
Although the name “QE3” might not be explicitly used, the Fed’s present monetary policy moves exhibit many of the features of past rounds of quantitative easing. This “incognito” strategy lets the Fed negotiate the complexity of the present economic scene while maintaining a favorable economic development climate. The Fed will have to carefully evaluate the potency of its programs and modify its strategy as the economy develops.