Web Exclusive: What is QE3?

Global markets saw heavy unwinding today on reports that the US Federal Reserve could prematurely wind down its bond buying programme. Here is a quick primer on what is QE3 and its implications.


Most risk assets slid to 2013 lows on Thursday with sentiment rattled by overnight market talk of a hedge fund liquidating big positions in commodities, as well as worries the US Federal Reserve could prematurely wind down its bond buying programme, also known as QE3 – or the third round of quantitative easing.

“The minutes of the last Fed meeting have raised concerns that, the Fed may withdraw the monetary stimulus if there is some improvement in the economic data. This has raised concerns about fund flows across asset classes, including emerging markets. Indian markets have received substantial FII money over the past few months and any reversal of the same may make markets vulnerable, if matching flows do not come from the domestic participants," said Dipen Shah, Head of PCG (Private Client Group) Research, Kotak Securities.

Here is a quick primer on what is QE3 and its implications.


What is quantitative easing?

A central bank buys large amounts of assets -- in this case, bonds backed by housing mortgages -- in an effort to bring down interest rates and boost the economy. The Federal Reserve has tried quantitative easing twice before, thus earning this round the designation QE3.

How does it work?

To buy bonds, the Fed essentially creates money from nothing, paying for its purchases by crediting the accounts of banks from which it buys the bonds.





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