The controversy over the Federal Reserve tapering its bond purchases, which are part of quantitative easing 3 is largely misunderstood. And now the debate may need to be reopened because the debt ceiling debate may significantly be weakening demand for U.S. Treasuries.
Let’s start from the beginning. The credit crisis that peaked in 2008 was a shock to the economy that required a massive deleveraging. The bottom line was the economy stunk, which caused the Fed to lower interest rates to zero. While technically in recovery the last few years, the economy has continued to struggle and with interest rates at zero and no chance the Congress would help stimulate the economy on the fiscal side the Fed initiated quantitative easing (purchasing mortgage back securities and Treasury assets).
In the last few years the Fed initiated, QE1, QE2, Operations Twist (buying longer term Treasuries as shorter-term products came up) and finally the open ended $85 billion in monthly purchases that is QE3.
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