Question

What are quantitative easing and forward guidance policies?

Answer 1

Quantitative easing: Quantitative easing(QE) is one of the unconventional policy tool of US Federal Reserve which was used during the great recession of 2007-2009, since Fed's funds rates were near to zero and were not enough to boost the economy to take it out of recession, Quantitative easing was adopted as an unconventional policy measure and in this long terms treasury bonds were purchased by the USD Fed to increase money supply in the economy and to save the failed financial institutions and Fed did this to increase money supply in the economy and to finance the financial institutions in order for them to invest in the economy/give loans to the business firms in order to boost the production, employment level and demand for goods and services to reverse the effects of recession and US Fed did QE1, QE2 and QE3 to purchase long term treasury and agency bonds in order to increase money supply in the economy and boost loans and investment in the production of goods and services, before QE and at the start of crisis Fed had reserves of treasury and agency bonds of USD 1 trillion and after QE1, QE2 and QE3 Fed had reserves of USD 4 trillion.

Forward guidance policy: Forward guidance policy is the communication about future short term interest rates which gives certainty about the future short term interest rates in order to encourage investors and business firms to invest in present in order to gain from its future positive effects, for example during great recession US fed has declared that it won't increase short term interest rates in near future, at least for two years till late 2014 until unemployment is lowered to 6.5% and inflation rate remained below 2.5% and this was the forward guidance to the market about certainty of future short term interest rates which has given boost to the investment in the economy and which lowered the unemployment to its threshold level.