Did QE2 Work?
April 11, 2011
The Federal Reserve's latest easing move, a $600 billion purchase of U.S. government bonds, known as QE2, has elicited much criticism from Congress and some members of the Fed's own policy board. There are some guides -- though they are controversial -- for determining when a central bank should stop easing after a financial crisis such as occurred in 2008. In light of those criteria, it is not clear that the criticism of QE2 is valid, says John Makin, resident scholar with the American Enterprise Institute.
- Critics of the Fed's QE2 program claim that it pushes the Fed into an inflationary stance.
- While that outcome may eventually emerge, so far the QE2 program has arrested last summer's deflation scare while -- with the help of the second fiscal stimulus enacted in December 2010 -- boosting equity markets.
- Since the risk surge tied to higher energy costs and Japan's nuclear accident, interest rates on 10-year Treasury notes have dropped by about 30 basis points, suggesting that the Fed's QE2 stance has not disturbed the anchor on inflation expectations even as headline inflation rises.
- Absent QE2 and stimulus 2, which will end in the coming months, interest rates and prospective U.S. growth would be even lower.
The Fed's sharply criticized QE2 could prove to be serendipitous -- or not if risk factors disappear. The bottom line: the right amount of central bank purchases of government debt is very hard to determine and highly variable. There are no hard-and-fast rules to follow. It may turn out that central banks have to threaten inflation to avoid deflation and then abruptly reverse policy if core inflation starts to rise, says Makin.
Source: John Makin, "Has the Fed Eased Too Much?" Real Clear Markets, April 6, 2011.
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