Quantitative easing barely registered on world markets but the message from the US Federal Reserve was heard throughout the world: it would use every measure possible to ward off deflation.
The move to support US asset prices through printing money served to slightly bolster already-high equity markets and pushed the Australian dollar to trade above parity with the US dollar for most of the morning.
George Tharenou, an economist with investment bank UBS, said the Fed’s announcement overnight of $US600 billion ($600 billion) in treasury purchases was combined with a commitment to continue buying troubled mortgage securities, bringing the total value of the package close to $US1.1 trillion.
The second round of quantitative easing, or QEII, adds to $US1.7 billion in unconventional measures it launched after the collapse of Lehman Brothers in September 2008.
Mr Tharenou said the Fed was continuing action in an environment in which it could not cut already low official interest rates.
‘‘Whether or not the Fed can actually stop deflation is a matter of debate (but) I think the Fed is taking the best possible action it can,’’ Mr Tharenou said.
Andrew Pease, the chief investment strategist for fund manager Russell Investments, said the Federal Reserve had highlighted its commitment to restoring inflation and warding off deflation, with early signs being positive.
‘‘It’s a big package,’’ he said. ‘‘The question is what impact is it going to have. Is it going to be pushing on a string or is it going to do something? My guess is its going to reinforce positive price expectations.’’
Mr Pease said of deflation, which occurred in Japan after its own debt crisis in 1990: ‘‘People don’t spend, businesses can’t make profits ... there’s a whole lot of problems when an economy falls into deflation.’’
Mark Reade, a director of credit strategy for investment bank Citi, said the lack of market reaction was due to the package being broadly in line with expectations.
‘‘The Fed reiterated its commitment to keep rates low for an extended period of time,’’ he said. ‘‘That commitment is going to support asset prices.’’
He said the willingness to support prices also supported people's willingness to continue to invest in riskier assets - including equity markets and the Australian dollar.
On the news, the US dollar fell slightly below parity with the Australian dollar and remained there around midday.
However, Mr Pease warned the Australian dollar was ‘‘overvalued by just about any metric’’.
swashington@smh.com.au