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New York Fed 101: The Federal Reserve's $600 Billion Treasury Purchase Program (Called by some QE or QE2)

On November 3, 2010, the Federal Reserve announced plans to purchase $600 billion in longer-term U.S. government debt from the private sector. The goal of this program was to support the economic recovery, spur job creation, and ensure that inflation, over time, is at levels consistent with the Federal Reserve's mandate.

The Fed has been mandated by law to promote maximum employment and price stability. The recent recession and slow recovery through late 2010 resulted in an unacceptably high unemployment rate and an inflation rate below the level (near 2 percent1) the Fed judges to be consistent with its mandate. It is the Fed's job to do what it can responsibly do to help bring down unemployment to the lowest level the economy can sustain over the medium term and to make sure that inflation returns to a level more consistent with its mandate.

Normally, when the economy is weak, unemployment is too high and inflation too low, the Federal Reserve lowers short-term interest rates. Lowering short-term interest rates in turn eases what economists call broader financial conditions—reducing the cost of longer-term finance and raising the value of assets such as stocks and homes. Lower interest rates in the United States typically results in some downward pressure on the foreign exchange value of the dollar as well. All these factors support spending, employment and growth.

But in late 2010 there was little scope to lower short-term rates further because these rates were already near zero. So the Federal Reserve decided to use large-scale purchases of longer-term assets as a means to ease financial conditions and support economic activity instead. Asset purchases had already been used successfully in recent years, and in August 2010 the Fed began reinvesting repayments of principal on the securities it had already purchased. The Treasury securities bought under the asset purchase program are backed by the full faith and credit of the U.S. government.

Like lowering short-term interest rates, buying assets eases financial conditions through several channels. Such purchases put downward pressure on longer-term borrowing costs relative to where they would be without them—although long-term interest rates will still go up and down depending on investors' confidence in the economy and other factors. Lower longer-term interest rates support the value of stocks, homes and other assets, increasing household wealth. As normally happens when the Fed lowers interest rates, this may lead to a moderate change in the foreign exchange value of the dollar that supports demand for U.S.-produced goods. By easing financial conditions, Fed asset purchases help foster greater spending by households and businesses, increase employment and keep inflation from falling further.

The Federal Reserve completed the $600 billion asset purchase program on June 30, 2011.
1 To be more precise, most policymakers aim for an inflation rate of 2 percent or a bit less as measured by the personal consumption expenditures (PCE) deflator, which equates to roughly 2 percent consumer price inflation.
Additional Information
Fast Facts: $600 Billion Treasury Large-Scale Asset Purchase Program »
Presentation by Steve Meyer
Recent Federal Reserve Monetary Policy