What Was Quantitative Easing 2 (QE2)

QE2 refers to the second round of the Federal Reserve's quantitative easing program that sought to stimulate the U.S. economy following the 2008 financial crisis and Great Recession. Announced in November 2010, QE2 consisted of an additional $600 billion in purchases of U.S. Treasuries and the reinvestment of proceeds from prior mortgage-backed security purchases. 

Understanding QE2

Quantitative easing stimulates an economy through a central bank's purchase of government bonds or other financial assets. Often, central banks use quantitative easing when interest rates are already zero or at near 0% levels. This type of monetary policy increases the money supply and typically raises the risk of inflation. Quantitative easing is not specific to the U.S. and is used in a variety of forms by central banks around the world.

QE2 came at a time when the U.S. recovery remained patchy. While equity markets had recovered from 2008 lows, unemployment remained high at 9.8%—two percentage points above Great Recession levels. The fundamental reason behind QE2 was to shore up bank liquidity and lift inflation. At the time of the announcement, U.S. consumer prices had remained stubbornly low.

Interest rates initially rose after the announcement, with the 10-year yield trading above 3.5%. However, from February 2011, three months after the announcement, the 10-year yield began a two-year year decline, falling 200 basis points to trade under 1.5%.

The Impact of QE2

QE2 was relatively well received, with most economists noting that while asset prices were propped up, the health of the banking sector was still a relative unknown. It was less than two years since the collapse of Lehman Brothers, and with confidence still low, it was prudent to promote investment through cheaper money. The policy was not without its critics. Some economists noted that previous easing measures had lowered rates but did relatively little to increase lending. With the Fed buying securities with money that it had essentially created out of thin air, many also believed it would leave the economy vulnerable to out-of-control inflation once the economy fully recovered.

Two years later, the Federal Reserve embarked on its third round of quantitative easing (QE3), something that was not as well received with many saying the Fed balance sheet had expanded to an already lofty level and it was time to seek alternative strategies.