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gauravs
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Joined: November 4th, 2010, 7:27 am

QE2 and Long term Interest Rates

January 23rd, 2011, 5:30 pm

Hi, I have recently started reading about QE2. The intent of the program was to boost the economy by reducing long term interest rates. But many articles say that the interest rates on 10 year treasury have risen after QE2. At the same time, its said that growth has picked up due to QE2. I wanted to know about whether QE2 has actually led to a rise in long term rates. If yes, how is this working as a stimulus to the economy. I would be grateful if anyone could provide some answers or point me to some link which clears my doubt.Regards,GS
 
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honeyoak87
Posts: 17
Joined: December 16th, 2010, 6:36 pm

QE2 and Long term Interest Rates

January 23rd, 2011, 6:08 pm

I can understand why it is confusing but i suggest that you ignore ANY THING that the popular media says about such topics. The topic is simply too complicated for it to be conveyed profitably in a major media outlet. If you want to better understand monetary policy I highly suggest that you read scott sumner @ http://www.themoneyillusion.com/ and paul krugman @ http://krugman.blogs.nytimes.com/It really important to understand that interest rates are an equilibrium outcome. the central bank influences them through QE by buying and selling treasuries, it does not determine them in the sense that a retail outlet would set prices for clothing. As far as "boosting the economy" goes, the effects of monetary policy are quite complicated and are still a lively topic of discussion. What has been established though is that the interest rate effect (i.e. the wealth from the lower rates of borrowing) has very little effect on the macro-economy as this is a small part of most companies revenues and small innovative companies mostly self finance. what is much more important seems to be the credit effect (i.e. how much is being lent, not its price), the liquidity effect (how easy is it to transform financial instruments), and expectations for monetary policy.
 
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Bonsai
Posts: 22
Joined: February 17th, 2010, 3:04 pm

QE2 and Long term Interest Rates

January 24th, 2011, 10:40 am

Totally disagree. I know that I am probably the one with the least knowledge in quant analyses here at WILMOTT, but to sell the QE as some kind of sophisticated tool is just a joke. The FED wants to flood the markets with liquidity. Thats all.All that matters is the expectations of liquidity pumped in the system, moving asset prices higher, exception of course bonds. Why do bonds at this stage do not move up? Because it has been a manipulated market, coming out of QE1. The Gov. and the FED are working together: Tax reductions or extensions of Bush tax cuts gave the markets some hundreds of millions new cash. Together with QE2 its probably more than USD 1 trillion more liquidity than expected in the beginning of the year.We are in the end game, of central banks manipulation of financial markets. It will end at that point, where we have 5 - 10 Lehman at once. Needless to say that the average Investment bank has 2-4 % of equity vs. the exposure on the book.The FED is working on the Timebomb, expect it to blow up latest in 2014, earliest 2013.QE is an economic nonsense to support a rotten financial system that moves towards failure
 
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Gmike2000
Posts: 801
Joined: September 25th, 2003, 9:49 pm

QE2 and Long term Interest Rates

January 24th, 2011, 9:37 pm

QE2 has backfired and the FED has lost some of its credibility. The market essentially learned that no one, not even the FED, can control the yield curve. They can set the funds rate, ok, but they cannot set the 10yr rate.This has been one of the most horrible bond sell-offs since 2003. The FED buybacks have largely had a neutral impact at best. Like I dont see the effect on a day when the FED comes in and buys. Maybe they do it the wrong way with this auction type format. Maybe they should just go in randomly and lift the hell out of every dealer in the street. That would teach them for showing low prices.
Last edited by Gmike2000 on January 23rd, 2011, 11:00 pm, edited 1 time in total.
 
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Bonsai
Posts: 22
Joined: February 17th, 2010, 3:04 pm

QE2 and Long term Interest Rates

January 25th, 2011, 7:20 pm

QE2, I think is 75 bio. a month. So almost nothing of the money has found its wayinto the market, nor the extension of the tax cuts have had an immediate effect onthe money in circulation. It is a typical shock and awe tactic, to scare the marketsin order to change investors asset allocation. The FED says to the Market for risky assets: When ever you fall, I will be there. Asthey did sharply, several times in 2010, it finally jumped in and printed money. The moveof the markets, after announcement was out of bonds into risky assets whatever - but as fast as possible. This created a real vacuum in risky assets, since the previous sellersall became buyers again and the liquidity for some commodities and equities was very low. The FED, with it's meager 75 bio. a month program, at that point, was not in the markets.They were thinking: What would be the most expensive way for the US tax payer to buy These bonds? Let's give the deal Wall-Street, to the poor bankers with the broken businessmodel, financed by us, the FED anyway. And I think, and I am almost sure, 70 % of thesetrades will be done by Goldman Sachs. The only effect the FED has on markets with QE2 is the change in asset allocation, but themoney injected is never enough. Since the blindfolded central bank interventions started with Mr. Greenspan, the US house hold has added about USD35 trillion in debt, Hugh Hendry writes. Compare this with a total money throwing including bailouts by the FED, that was about 9 Trillion, we are from over with QE's. There will be debt! Debt, coupled with an aging population and a Central Bank out of it's mindmust be Japan! No it's the US, or probably both.Twin Brothers
 
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farmer
Posts: 13477
Joined: December 16th, 2002, 7:09 am

QE2 and Long term Interest Rates

January 26th, 2011, 1:06 pm

QuoteOriginally posted by: gauravs I have recently started reading about QE2. The intent of the program was to boost the economy by reducing long term interest rates. But many articles say that the interest rates on 10 year treasury have risen after QE2.I have a thread where I ask anyone who can provide quotes about the intent do so. Thank you.
 
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Gmike2000
Posts: 801
Joined: September 25th, 2003, 9:49 pm

QE2 and Long term Interest Rates

January 31st, 2011, 7:48 pm

QuoteOriginally posted by: farmerQuoteOriginally posted by: gauravs I have recently started reading about QE2. The intent of the program was to boost the economy by reducing long term interest rates. But many articles say that the interest rates on 10 year treasury have risen after QE2.I have a thread where I ask anyone who can provide quotes about the intent do so. Thank you.http://www.washingtonpost.com/wp-dyn/co ... x1Bernanke writes in paragraph 5 about "lower mortgage rates" and "lower corporate borrowing rates". Case closed. Thank you.
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