Introduction:

With just two days remaining until the Federal Reserve Board’s key policy meeting, it is almost impossible to avoid the term “quantitative easing round two (QE2)” in the financial press. Ever since the keynote speech by Fed Chairman Ben Bernankelast August 1, rumors have been rampant that the Fed will implement a daring strategy to ease unemployment and tamper deflation. But what exactly is QE2, and what can the Fed accomplish with this new tool? More relevant to corporate cash investors, what are the likely implications of this policy shift on yields and risks in the short-duration investment universe?

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