Effects of U.S. Unconventional Monetary Policy and Implications for QE3

Abstract

On August 20, 2012, the Federal Reserve announced a third round of quantitative easing (QE3), and interest is mounting as to the significance and influence of this policy. This study analyzes the effects of US unconventional monetary policies implemented during the global financial crisis, such as quantitative easing, Operation Twist, and the Federal Reserve’s policy commitment regarding the course of short-term interest rates. Moreover, it discusses the significance and implications for the QE3. Up to now, unconventional US monetary policy actions have improved the condition of US financial markets and lowered long-term Treasury yields, mortgage-backed security (MBS) rates, and corporate bond yields. The effects of the first round of quantitative easing (QE1) were the most influential, while the effects of the second round (QE2) were only about a third as potent as QE1. The effects of Operation Twist were minor compared to QE2. QE1 resulted in lowering yields on 10-year Treasury securities by 128.6 basis points (bp) and MBS yields by 136bp. QE2 caused 10-year Treasury yields to drop by 42.93bp and MBS yields by 37.25bp. The effects of the quantitative easing policy on the stock market and foreign exchange market are not statistically significant. The effects of QE3 are expected to be less than the previous two QE programs. Up to now, QE3 has lowered 10-year Treasury yields by 8bp and MBS yields by 32.3bp. The implementation of the QE policy in major advanced economies may cause so-called excess global liquidity problems. Global liquidity expansion may result in instability in foreign exchange and international commodity markets.