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Why Bernanke Claims There Is No Quantitative Easing

Quantitative Easing

Ben Bernanke made an interesting comment to investors and economists today. In his speech in Frankfurt the chairman claimed that the Fed is not engaging in "quantitative easing" that focuses on bank reserves but are trying to affect interest rates. At the same time analysts are attempting to differentiate between the effects of an increase in the reserve requirements for Chinese banks by the central bank in that country from the potential of rising interest rates. What can be tricky for investors in the forex or outside is to understand the difference between these terms and definitions. As we look at the market today, lets make this a lot easier.

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Central banks can remove money from the system or they can add money to the financial system. Typically, they add money to attempt to lower rates and increase liquidity. Theoretically, that should help stimulate sluggish growth or employment. They take money out of the system to restrict its supply, which can have the effect of increasing nominal interest rates, reducing inflation and slowing growth. These cause and effect relationships are not perfect (far from it) but that is the basic idea behind what they are doing.

A central bank can remove or add money through reserve adjustments, open market activities, bond purchases, discount window interest rate adjustments, etc, etc. However, the net effect is the same - they are adding or taking money out of a system in an attempt to keep inflation moderate and growth high. So when traders wonder whether the Chinese central bank will raise rates or the Fed really is or isn't engaging in quantitative easing these are just words to describe the same two basic activities.

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Which, brings us to where we are now in the market. The Fed is easing (increasing the money supply) while the Chinese are tightening (removing money supply) and the world's two biggest economies are going to conflict. In today's Ask the Expert Forex video, I will go into more detail about why this is likely to lead to a flat trend in the near term for currencies as well as stocks. I will also go into more detail about how option traders take advantage of these situations and why stop losses may have to be adjusted to prevent excess volatility.

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Image Courtesy of tim Green

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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