"Economic growth in the US and most developed economies is anaemic and below expectations. Measures of inflation, both core and headline, are below the implicit and explicit targets of the Federal Reserve. The scenario is low growth, low inflation and an unemployment rate close to 10 per cent. If one were to run the numbers, you get that the Fed Funds rate (FFR) should be around minus 5 percent, but nominal policy rates have a zero lower bound. Quantitative easing (QE) by the US and other governments has been increasing liquidity to effectively push the real policy rate below zero. Some $600bn of additional liquidity in QE2 is the equivalent of a reduction of about 50-60 basis points in the FFR. When Ben Bernanke says this is just a variant of traditional monetary policy, I think that is correct, even if unconventional.
I think recent opposition to QE2, especially those that have said it is a disaster, is totally wrong. Given the high risk of a double dip recession, ask yourself where would the economy and risky asset prices be today if this had not been done. Asset price reaction had already priced in QE2 from Bernanke’s speech in Jackson Hole well ahead of the actual implementation. The stock market is about 10 per cent higher." - in RGE
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