Quantitative easing

In order to have a policy rate confined by the usage of the zero lower bound, most central banks adopt a tactic known as quantitative easing. Quantitative easing also refers to the practice of making significant purchases of financial assets. The goal of quantitative easing is to increase the amount of money or assets accessible on the market. Quantitative easing, according to James Bullard (2014), refers to the monetary policies used by the majority of central banks to accelerate the rate of economic growth in regions where the regular monetary policy is not performing effectively. The best application of quantitative easing relates to purchasing financial assets from other related banks, as well as financial institutions (Krishnamurthy & Vissing-Jorgensen, 2011). The other application consists in raising the bank's prices to reduce the central banks selling with the intention of increasing the money supply to the customers. Additionally, quantitative easing intends at ensuring that the inflation does not meet the lower amount of the set target. For this reason, therefore, the paper seeks to address the use of quantitative easing by the Federal Reserve in the United States, identifying their impacts and assumptions related to application of quantitative easing to the company and the public, in the by the government and the customers.

When federal reserves decided to engage in quantitative easing, there were several underlying assumptions concerning the impacts of quantitative easing to the company. The assumptions of the impacts relate to the application of quantitative easing by the central banks. First, there were assumptions that quantitative easing will bring higher inflation rate that was expected during the starting period of the process (Krishnamurthy et al., 2017). Consequently, it was evident that the cases of inflation will occur after the implementation of the approach in a company’s operational system. It is clear that a higher inflation rate occurs due to overestimation of the amount of easing as well as too much production of money by the process of the liquid asset purchase. Additionally, the introduction of quantitative easing may bring failures to the demand if the bank remains focused on utilizing and applying the approach. The other assumption was that the request of the foreign currency of the bank would finally reduce with the application of the quantitative easing. However, despite the reduced demand level, the supply will ultimately increase bringing an imbalance in the financial market. The predicted assumptions based on the impacts of Fed engaging in quantitative easing finally came true. However, they did not exist during the first years of the application of the approach. Nevertheless, it took the company more years to realize and note the impacts.

Quantitative easing can stimulate the economy through various mechanisms. Quantitative easing works through multiple channels to achieve its benefits on the economy of a given state. In this case, quantitative easing creates additional reserves, in which some of them are used to purchase financial assets, therefore increasing the prices of the targeted assets. This indicates a realization of an increase in the values of stock by use of quantitative easing, which enhances the quantity of wealth with a resultant increase in spending. Moreover, the quantitative easing raises the downward pressure on the exchange rates (Krishnamurthy & Vissing-Jorgensen, 2011). The approach leads to an increase in exports while reducing the import rates, which is another basic means of stimulating the economy of a given country. Quantitative easing increases bank reserves by instilling fear of inflation among the citizens. With such concerns, the people will have to purchase more goods at present, thus, stimulating the economy.

Moreover, quantitative easing has several ways of affecting the economic sector of a country including housing, banks, and corporations. Additionally, it also has tremendous effects on inflations, as well as the employment rate in a country. Due to the increase in the inflationary expectations, the interest rates drop. By doing so, businesses and investments are stimulated to move to the higher levels. That is because people view the situation considering the profits that they will get in return at the end of inflation effects (Bullard, 2014). Therefore, based on the household sector, there is an increased value or advantage that the industry gets because of the existence of quantitative easing. On the other hand, the banks also have a long-term gain towards the loans that they grant to their members. Due to the effects of the inflation, the banks will lend out money at lower interest rate but will receive the money back at a higher interest rate. That means that, due to quantitative easing, the number of people lending will increase the investment rate and the inflation (Krishnamurthy & Vissing-Jorgensen, 2011). However, based on employment, quantitative easing is not in the position of enhancing the employability rate in the most of the countries. Therefore, it is evident to understand that quantitative easing causes both a reducing and an increasing effect depending on the reaction and the relationship involved about the interest rates.

Quantitative easing will have several impacts on the company’s cost capital. Moreover, the effects will also extend to the valuation of the company’s stock as well as the capital structure. In most cases, the company’s cost of the structure, capital cost as well as assessment of the stock relies on the procedures of the rate under the use of quantitative easing. The primary target of quantitative easing is to upsurge the supply of funds in the economy (Krishnamurthy et al., 2017). In some cases, the objective of quantitative easing ends up depreciating the exchange rates of a given country by use of the interest rate approach. With a lower interest rate, there exists a capital outflow, which ends up affecting the demand for the country’s currency, making the country to have a weaker currency than before. Based on the company’s cost of capital, quantitative easing tends to reduce the return rate of the investment due to the existence of a lower interest rate. This will automatically affect the capital structure since the country will not be in a position to meet the expected rate of return. Moreover, it will also inflict some changes in the currencies provided by the state (Bullard, 2014). Finally, the value of the stock price for the company will also decrease if at all they will be forced to use the currency of the country. Due to the weaker currency imposed in the country, the demand of foreign countries deceases their rate of buying the currency, hence decreasing the value of stock price.





























References

Krishnamurthy, A., Krishnamurthy, A., Foster, T., & Foster, T. (2017). Quantitative Easing in the Great Recession. Kellogg School of Management Cases, 1-23.

Krishnamurthy, A., & Vissing-Jorgensen, A. (2011). The effects of quantitative easing on interest rates: channels and implications for policy (No. w17555). National Bureau of Economic Research.

Bullard, J. (2014, April). Two views of international monetary policy coordination. In Speech at 27th Asia/Pacific Business Outlook Conference USC Marshall School of Business–CIBER (Vol. 7).