Quantitative Easing?
Just what is Quantitative easing? It is a term heard frequently when referring to actions by the US Federal Reserve. The frequently used term is composed of two words, Quantitative, which refers to the money supply and easing, which means to increase the money supply. It is a tool of monetary policy and means that a central bank or government prints new money to increase the supply. The move by the Fed is bound to have an effect on the Interbank Forex market but to what extent is unknown at this time.
Fed Slashes Rates
On Tuesday the Federal Reserve cut overnight rates to zero to 0.25 %, an unconventional action meant to lift the economy out of a year-long recession. Doug Roberts, chief investment strategist at Channel Capital Research.com stated, “The message is they’re instituting quantitative easing on a fairly large scale.”
How it Works
Under quantitative easing, the Federal Reserve will flood the banking system with new money to promote lending. The action is usually taken when lowering interest rates is no longer effective because they already are at or near zero.
Central banks add cash by buying up large quantities of securities, mortgages, government debt, commercial loans, and even stocks from banks and financial institutions giving them plenty of money to lend. The Fed hopes the move will ‘prime the pump’ of the Interbank Forex market and get banks lending again.
Easing of Frozen Credit Markets
Recently the tool has been used by Japan to stimulate the economy and to fight inflation. Much of the global economic crisis is caused by frozen credit markets. Many corporations find themselves unable to secure loans necessary for day to day operations. The credit crunch has adversely affected the Interbank Forex market and banks have been unwilling to lend to each other.
Quantitative easing helped Japan to stimulate their economy and to make sure there was no shortage of liquidity. The Fed hopes it will do the same for the beleaguered US economy and stimulate lending on Interbank Forex markets.
Quick Forex Tip: Interbank forex dealers have access to better spreads than the average investor because of the size of the transactions. Small investors who want to trade interbank fx now have access through the use of forex brokers who are able to put together large transactions. Additionally, many very wealthy individuals trade interbank fx hoping to profit from currency fluctuations. Whether you have a lot or a little money to invest, interbank forex trading is a great option because forex markets are almost recession proof.
