Official launch of QE2
The full text of the Fed's announcement. What they are going to do:
Taken together, the Desk anticipates conducting $850 billion to $900 billion of purchases of longer-term Treasury securities through the end of the second quarter. This would result in an average purchase pace of roughly $110 billion per month, representing about $75 billion per month associated with additional purchases and roughly $35 billion per month associated with reinvestment purchases.
the assets purchased will have an average duration of between 5 and 6 years.
They want to push the interest rates even lower to keep their borrowing affordable and encourage investment in businesses (the stock market) which will yield more of a return for savers than Uncle Sam's IOUs. The longer term debt profile helps stabilise the US sovereign debt and everything will hopefully turn out OK as the economy lifts and unemployment falls... is their theory. An optimistic theory.
The immediate consequence of pumping in so much money however is that they have unilaterally devalued their currency.
Brian Fallow at the NZ Herald:
Whatever the benefits then, there are doubts about how much good this will do now.
Is it the level of interest rates that is holding back the US economy, keeping unemployment high and output way below capacity?
Are banks not lending more because they lack the funds?
Perhaps the major mechanism for quantitative easing to spur growth in US economy, however, is to reduce the international value of the US dollar, boosting the competitiveness of its exports and of locally produced goods that compete with imports.
The effectiveness of this, however, will be stymied at least partially by China's policy of allowing only a creeping revaluation of the yuan relative to the US dollar.
It crates the spectre of a world divided into two camps - a US dollar bloc including the US, China and the petro-economies - and the rest of us, with exchange rates driven higher as the US debases its currency.
Countries whose currencies are already buoyed by high commodity prices, including New Zealand and Australia, are particularly vulnerable.
A tsunami of yield-seeking hot money could be coming our way. The last one proved destructive. We have yet to recover.
A flurry of central bank meetings over the next few days, including the European Central Bank, the Bank of Japan and the Bank of England, may give some guidance on how the major players will react.
The NZD is at about 0.78c US today. The clueless NZ Treasury in their previous forecasts think we wouldn't go over 0.71 and will head down to a natural level of 50c in the next few years. That is what they have premised their projections on and is why they will get everything so totally wrong. All the signs of a long term decline of the USD have been evident for a few years now.