European stocks rose to a four-week high amid optimism the Bank of Japan’s stimulus will fill some of the gap left by the end of Federal Reserve bond buying.
Japan’s central bank and its $1.1 trillion pension fund stormed back onto the global stage, reasserting themselves as allies to investors and Prime Minister Shinzo Abe as he renews efforts to bolster growth.
Tokyo Stock Bears Suffer as Record Shorts Precede Surge
By Kana Nishizawa and Jonathan Burgos Oct 30, 2014 11:46 PM PT
Central Banks Answer the Markets’ Prayers (For Now)
by MARK GIMEIN | OCT. 31, 2014
Just as the U.S. Federal Reserve winds down its asset purchases, the Bank of Japan expands its own program. World stock markets, rejoice.
Central bank asset purchases dramatically lower bond returns and effectively push money into the stock market. When they end, the flow of money reverses.
Quantitative Easing
DEFINITION OF 'QUANTITATIVE EASING'
An unconventional monetary policy in which a central bank purchases government securities or other securities from the market in order to lower interest rates and increase the money supply. Quantitative easing increases the money supply by flooding financial institutions with capital in an effort to promote increased lending and liquidity. Quantitative easing is considered when short-term interest rates are at or approaching zero, and does not involve the printing of new banknotes.
INVESTOPEDIA EXPLAINS 'QUANTITATIVE EASING'
Typically, central banks target the supply of money by buying or selling government bonds. When the bank seeks to promote economic growth, it buys government bonds, which lowers short-term interest rates and increases the money supply. This strategy loses effectiveness when interest rates approach zero, forcing banks to try other strategies in order to stimulate the economy. QE targets commercial bank and private sector assets instead, and attempts to spur economic growth by encouraging banks to lend money. However, if the money supply increases too quickly, quantitative easing can lead to higher rates of inflation. This is due to the fact that there is still a fixed amount of goods for sale when more money is now available in the economy. Additionally, banks may decide to keep funds generated by quantitative easing in reserve rather than lending those funds to individuals and businesses.
For more information on the policy of quantitative easing, read Quantitative Easing: What's In A Name?
Central banks normally set the price of money using official interest rates to regulate the economy. These interest rates radiate out to the rest of the economy. They affect the cost of loans paid by companies, the cost of mortgages for households and the return on saving money. Higher interest rates make borrowing less attractive because taking out a loan becomes more expensive. They also make saving more attractive, demand and spending reduces. Lower interest rates have the reverse effect.
But interest rates cannot be cut below zero and when official rates get close to zero the effect they have on regulating the economy becomes muted. Banks still need to make a profit and in troubled times the gap between the official interest rate and the rates faced by companies and households can rise, because lenders want a greater return for the additional risk of granting a loan when times are tough.
When interest rates are close to zero there is another way of affecting the price of money: Quantitative Easing (QE). The aim is still to bring down interest rates faced by companies and households and the most important step in QE is that the central bank creates new money for use in an economy.
Only a central bank can do this because its money is accepted as payment by everybody. Sometimes dubbed incorrectly "printing money" a central bank simply creates new money at the stroke of a computer key, in effect increasing the credit in its own bank account.
It can then use this new money to buy whatever assets it likes: government bonds, equities, houses, corporate bonds or other assets from banks. With the central bank weighing in, the price of the assets it buys should rise and the yield, or interest rate, on that asset will fall. Companies for example with a willing central bank seeking to buy its bond, will be able to pay a lower interest rate when new bonds are issued or existing bonds come to the end of their life and need to be replaced.
With cheaper borrowing the hope is that the central bank will again encourage greater spending, putting additional demand into the economy and pulling it out of recession. As the money ends up in bank deposits, banks should also find their funding position improved and make them more willing to lend.
A side effect will be that this new money is expected to raise consumer prices giving people another incentive to buy now rather than later.
Of course there are risks. First, a central bank can lose money on its purchases, money that will ultimately have to be underwritten by taxpayers either with higher future taxation or by the central bank creating more money and risking higher future inflation. Second, go too far with creating and spending money and you will destroy the value of the currency. Inflation or even hyperinflation is the result. Third, if a descent into QE destroys confidence in an economy rather than gives reassurance that the authorities are on the case it can be counter-productive.
That is why central banks cannot use QE willy-nilly, but if you are not aggressive enough QE simply will not work to change other interest rates in the economy and stimulate demand. The trouble is, because the policy is unorthodox and the situation is dramatic no one knows how much QE is too much and how much is not enough. Who would be a central banker at the moment? [1]
View
Investors Chronicle: Lowdown QE
Q&A: Quantitative easing
Slideshow: How effective is quantitative easing?
Interactive graphic: quantitative easing explained
Source: http://lexicon.ft.com/Term?term=quantitative-easing
b
The idea is to do it slowly and gradually and not cause a panic. So far the Fed is succeeding. However, over the long run pulling out of the stimulus without scaring the markets is a tough difficult maneuver to pull off (and stock market returns are not necessarily the central bank’s concern.
The Bank of Japan pulled out of its last stimulus program, in 2006, fairly smoothly. But as the chart below shows, it was the prelude to three years of market declines.
TAGS: BANK OF JAPAN, FED, STIMULUS
Quantitative Easing
- The Economist (blog) - 3 hours agoOn October 31st the Bank of Japan (BoJ) stunned the financial markets by unexpectedly expanding its programme of quantitative easing.
- BBC News - 18 hours ago
- The Guardian (blog) - 2 days ago
Quantitative Easing
DEFINITION OF 'QUANTITATIVE EASING'
An unconventional monetary policy in which a central bank purchases government securities or other securities from the market in order to lower interest rates and increase the money supply. Quantitative easing increases the money supply by flooding financial institutions with capital in an effort to promote increased lending and liquidity. Quantitative easing is considered when short-term interest rates are at or approaching zero, and does not involve the printing of new banknotes.
INVESTOPEDIA EXPLAINS 'QUANTITATIVE EASING'
Typically, central banks target the supply of money by buying or selling government bonds. When the bank seeks to promote economic growth, it buys government bonds, which lowers short-term interest rates and increases the money supply. This strategy loses effectiveness when interest rates approach zero, forcing banks to try other strategies in order to stimulate the economy. QE targets commercial bank and private sector assets instead, and attempts to spur economic growth by encouraging banks to lend money. However, if the money supply increases too quickly, quantitative easing can lead to higher rates of inflation. This is due to the fact that there is still a fixed amount of goods for sale when more money is now available in the economy. Additionally, banks may decide to keep funds generated by quantitative easing in reserve rather than lending those funds to individuals and businesses.
For more information on the policy of quantitative easing, read Quantitative Easing: What's In A Name?
VIDEO
Definition of quantitative easing
Central banks normally set the price of money using official interest rates to regulate the economy. These interest rates radiate out to the rest of the economy. They affect the cost of loans paid by companies, the cost of mortgages for households and the return on saving money. Higher interest rates make borrowing less attractive because taking out a loan becomes more expensive. They also make saving more attractive, demand and spending reduces. Lower interest rates have the reverse effect.
But interest rates cannot be cut below zero and when official rates get close to zero the effect they have on regulating the economy becomes muted. Banks still need to make a profit and in troubled times the gap between the official interest rate and the rates faced by companies and households can rise, because lenders want a greater return for the additional risk of granting a loan when times are tough.
When interest rates are close to zero there is another way of affecting the price of money: Quantitative Easing (QE). The aim is still to bring down interest rates faced by companies and households and the most important step in QE is that the central bank creates new money for use in an economy.
Only a central bank can do this because its money is accepted as payment by everybody. Sometimes dubbed incorrectly "printing money" a central bank simply creates new money at the stroke of a computer key, in effect increasing the credit in its own bank account.
It can then use this new money to buy whatever assets it likes: government bonds, equities, houses, corporate bonds or other assets from banks. With the central bank weighing in, the price of the assets it buys should rise and the yield, or interest rate, on that asset will fall. Companies for example with a willing central bank seeking to buy its bond, will be able to pay a lower interest rate when new bonds are issued or existing bonds come to the end of their life and need to be replaced.
With cheaper borrowing the hope is that the central bank will again encourage greater spending, putting additional demand into the economy and pulling it out of recession. As the money ends up in bank deposits, banks should also find their funding position improved and make them more willing to lend.
A side effect will be that this new money is expected to raise consumer prices giving people another incentive to buy now rather than later.
Of course there are risks. First, a central bank can lose money on its purchases, money that will ultimately have to be underwritten by taxpayers either with higher future taxation or by the central bank creating more money and risking higher future inflation. Second, go too far with creating and spending money and you will destroy the value of the currency. Inflation or even hyperinflation is the result. Third, if a descent into QE destroys confidence in an economy rather than gives reassurance that the authorities are on the case it can be counter-productive.
That is why central banks cannot use QE willy-nilly, but if you are not aggressive enough QE simply will not work to change other interest rates in the economy and stimulate demand. The trouble is, because the policy is unorthodox and the situation is dramatic no one knows how much QE is too much and how much is not enough. Who would be a central banker at the moment? [1]
View
Investors Chronicle: Lowdown QE
Q&A: Quantitative easing
Slideshow: How effective is quantitative easing?
Interactive graphic: quantitative easing explained
Source: http://lexicon.ft.com/Term?term=quantitative-easing
MORE STOCKS NEWS
b
No comments:
Post a Comment