FOCUS ~ What is QE2? “QE2” stands for the second major phase of the Federal Reserve’s “Quantitative Easing.” And “quantitative easing” is a group of measures the Fed can take to keep interest rates low or make them even lower and, quite possibly, to raise the level of inflation slightly.
Having pushed the fed funds rate to a range of 0% to 0.25%, the Fed really doesn’t have this tool at its disposal; it can’t lower this rate further. So it must call upon other ways of keeping rates low.
The most-discussed option is for the Federal Reserve to buy up Treasury securities, making it certain that there will be plenty of buying pressure for the securities. That will translate into higher value for the securities, which in turn means their yields will be even lower.
There are positives and negatives with this option. It usually reduces the value of our currency, meaning the dollar’s exchange rate falls relative to the exchange rate of other currencies. As a result, for the holders of the other currencies, this can mean that their dollar-denominated investments lose a bit of value (a negative, since it decreases their yield) and that the lower value of the dollar means an effectively lower price for our exports (a benefit to the U.S. because we can sell more exports if our price declines).
Indeed, there is much discussion currently about how several nations, including the U.S., are handling their currencies, specifically trying to push their exchange values lower in order to give their own exports a pricing edge. Still, the DJIA’s levels have often risen and interest rates fallen when the Fed discusses a likely QE2.