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In a bid to increase liquidity (monetary supply) and promote lending – in particular when interest rates near rock-bottom levels but fail to revitalize the economy – the Fed resorted to the stimulus package, also known as quantitative easing, by flooding financial institutions with capital by buying back bonds.
In 2012, the Fed began its third phase of quantitative easing by buying back US treasury securities.
“These purchases have made a meaningful contribution to economic growth and improving the outlook,” Yellen told Senators.
In May, outgoing Fed Chief Ben Bernanke announced that the US was on the verge of ending its quantitative easing programme. His statement led to significant devaluation of currencies and flight of foreign capital in emerging markets.
In statements made to Congress on July 18, Bernanke said that the end to monetary easing could come in mid-2014.
However, at a closely watched meeting in September, the Fed surprised markets by voting to continue the stimulus package. It voted the same way in October, citing that the US economy was not yet strong enough to endure such a subtraction of monies from markets.
Bernanke had always said that the stimulus package would end when the national unemployment rate fell to 7 per cent.
In late October, the US Bureau of Labour Statistics said that while the unemployment rate remains largely unchanged since August at 7.2 per cent, hundreds of thousands of people filed for unemployment benefits in the wake of the government shutdown.
Yellen, the Fed’s current Vice-Chair, defended the quantitative easing regimen saying that it reduced unemployment and pushed down mortgage rates.
She said it was – given the current obstacles to a full economic recovery – the best option available.
“It’s important not to remove support, especially when the recovery is fragile and the tools available to monetary policy should the economy falter are limited,” she said at the hearing.
However, Yellen did not offer a timetable for when a possible cutback in the stimulus programme could begin.