Quantitative Easing (QE2) Explained, The Real Story

Quantitative Easing or QE2, as it has been nick named, is the front and center story today as the FOMC will make an announcement at approximately 2:15 EST on their decision to purchase additional securities. 

One major item that has been lost in the talk is what the FOMC is actually doing and why. 

Here is a simple explanation that may clarify and take some of the drama from today’s decision (market participants deem this important, so it becomes important, no matter what the actual event.)

The FOMC in the past has purchased securities in order to keep rates low and help the economy heal. Many of these securities are now coming due. If the FOMC allows these securities to expire, it becomes a gradual and natural tightening as money is extracted from the US financial system.

QE2 is simply the reinvestment of these maturing securities and thereby a continuation of the same (original stimulus) we have had rather than a gradual tightening.

In our minds the FED had hoped the US economy would be growing faster at this time, but had always kept this option open.

I hope this takes some of the mystery, and possibly mystic, out of the headlines that will come later today.

Have A Good Day!

JK