By Jill Schlesinger
Tribune Content Agency
Almost exactly six years ago, the Federal Reserve launched an unconventional program of buying bonds to rescue a faltering economy. Since then, the Fed’s balance sheet has ballooned by $3.5 trillion, close to 25 percent on the nation’s gross domestic product. As the central bank ends the program, known as “Quantitative Easing” (or “QE”), the big question is: So did QE work?
To answer that question, a quick explainer about QE. In a lecture at George Washington University in 2012, then-Federal Reserve Chairman Ben Bernanke explained how QE works. Here’s the quick version: The Fed buys U.S. Treasury bonds and mortgage-backed securities, which drives up prices, pushes down interest rates and reduces the availability of these bonds in the market. With fewer bonds available, investors turn to alternate assets, like corporate bonds. This part is important: when investors buy corporate bonds, they are essentially lending money to companies. The availability of corporate credit is an essential component in promoting the economic recovery, according to the Fed, and the byproduct of an improving economy is a rising stock market. One last thing: these bond purchases are not government spending, because the assets the Fed acquires are ultimately sold back into the market.
Now that we know what QE is, to determine if it worked, we need a reminder about the policy’s two goals: (1) to restore the functionality of markets, which had essentially locked up amid the financial crisis and (2) to boost the economy by lowering interest rates.
There is no doubt that the first round of QE, which began in November 2008 and the second round, which ran from August 2010 – June 2011, eased the strain in markets. According to Joe Gagnon, Senior Fellow at the Peterson Institute for International Economics, QE also “inspired confidence and…it convinced financial markets that the United States wouldn’t turn into Japan, which they were worried about.” The net result is that markets did start functioning more smoothly.
According to a Federal Reserve Board study, those first two rounds of QE also boosted economic growth. The bond buying “raised the level of output by almost 3 percent and increased private payroll employment by more than 2 million jobs, relative to what otherwise would have occurred…the incremental contribution of the program is estimated to grow to 3 million jobs.” Additionally, Bill McBride of Calculated Risk estimates that QE probably lowered interest rates by 0.50 percent, allowing some consumers and companies to refinance their higher interest debt, thus reducing monthly payments and improving monthly cash flow.
There have been a few criticisms of QE, including that it artificially boosted stock prices because investors were dissuaded from investing in bonds; penalized savers, who have been staring at zero percent rates on their savings, checking and CD accounts; and will ultimately lead to rampant inflation and a weaker U.S. dollar.
Despite these concerns, it seems like doing nothing would have been far worse. Sure, stock prices are trading higher than they might have without QE, but where would they be if the economy were stuck in an even lower gear? And yes, savers have taken it on the chin, but hopefully, they were not damaged as much in the downturn because of those nest eggs.
And while concerns about potential inflation are always important to consider, there is absolutely no evidence of inflation in the U.S. economy – in fact, recent reports point to a slowdown in prices, not an acceleration. The naysayers contend that although the Fed’s actions have not yet created inflation, they will down the road. They also say that when the Fed eventually sells the bonds, it will lead to destabilizing events across the globe.
QE may not have been the perfect policy solution, but in an environment where the government was a roadblock (anyone who thinks that austerity is the correct policy solution should take a look at how well it has played out in the eurozone), QE was far better than doing nothing.
Jill Schlesinger, CFP, is the Emmy-nominated CBS News Business Analyst. A former options trader and CIO of an investment advisory firm, Jill covers the economy, markets, investing and anything else with a dollar sign on TV, radio (including her nationally syndicated radio show), the web and her blog, “Jill on Money.” She welcomes comments and questions at askjill@moneywatch.com. Check her website at www.jillonmoney.com.
This column was printed in the November 16, 2014 – November 29, 2014 edition.
