What Was Quantitative Easing 2 (QE2)
The term QE2 refers to the second round of the Federal Reserve's quantitative easing program that sought to stimulate the U.S. economy following the 2008 financial crisis and Great Recession. Announced in November 2010, QE2 consisted of a further $600 billion in U.S. Treasuries, and reinvestment of proceeds from prior mortgage-backed security purchases.
- QE2 was a round of quantitative easing initiated by the Federal Reserve in late 2010 that expanded the central bank's balance sheet by around $600 billion.
- Quantitative easing refers to strategies that a central bank can use to increase the domestic money supply through the purchase of assets.
- QE is usually used when interest rates are already near 0% and resorts to non-traditional methods of stimulus.
- QE2 was followed by QE3 in 2013.
Quantitative easing was intended to stimulate an economy through a central bank's purchase of government bonds or other financial assets. Often, central banks use quantitative easing when interest rates are already zero or at near 0% levels. This type of monetary policy increases the money supply and typically raises the risk of inflation. Quantitative easing is not specific to the U.S., however, and is used in a variety of forms by other major central banks.
QE2 came at a time when the U.S. recovery remained patchy. While equity markets were upwards of 50% off their 2009 lows, the unemployment rate remain elevated at 9.8%, two percentage points of the Great Recession high. The fundamental reason behind round two was to shore up bank liquidity and lift inflation. At the time of the announcement, U.S. consumer prices were below 1% for the seventh consecutive month.
Interest rates initially rose after the announcement, with the 10-year yield trading above 3.5%. However, from February 2011, three months after the announcement, the 10-year yield began a two-year year decline, falling 200 basis points to trade under 1.5%.
The Impact of QE2
QE2 was relatively well received, with most economists noting that while asset prices were propped up, the health of the banking sector was still a relative unknown. It was less than two years since the collapse of Lehman Brothers, and with confidence still low, it was prudent to promote investment through cheaper money. The policy is not without its critics. Some economists note that previous easing measures have lowered rates but done relatively little to increase lending. With the Fed buying securities with money that it has essentially created out of thin air, many also believe it leaves the economy vulnerable to out-of-control inflation once the economy fully recovers.
Two years later, the Federal Reserve embarked on its third round of quantitative easing (QE3), something that was not as well received with many saying the balance sheet had expanded to an already lofty level and it was time to seek alternative strategies.