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Weekly Economic Briefing

Source: Riyad Bank

COMMENTARY
The Impact of the QE2 on the US Economy

The Federal Reserve Bank of San Francisco (FRBSF), has just released a study, which concluded that the Federal Reserve’s full quantitative easing program (started in 2008 and to end in June 2011) will boost the real GDP by 3 percentage points by the middle of 2012 and to add around 3 million jobs in the private sector. The last phase of the program (QE2) which included purchasing of $600 billion of Treasury securities that started in Nov. 3 will alone add roughly 700,000 jobs. The Fed's Vice Chair Janet Yellen used the results of the above study in explaining the impact of the program on the US economy. As we already know, and the research paper explains, the QE2 program relates to the Fed's action to buy long-term government debt from the market by issuing more short-term debt in form of monetary base. Monetary base contains currency in circulation and bank reserves. According to the latest numbers by the Federal Reserve Bank, the Fed's holding of securities has increased by $122 billion since the QE2 program began in November 2010. However, we see modest increases in currency and reserves. Since November 4th, the increase in currency is about $18 billion, and in reserves only about $10 billion. So, with such small numbers in changes in the monetary base, we do not expect to see much impact of QE2 through the money stock.

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