The Federal Reserve officially closed the curtain this week on quantitative easing, the central bank’s unprecedented, long-running and highly controversial bond purchasing program initiated at the outset of the 2008 financial crisis.
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Perhaps the most interesting thing about QE, given the sharply differing views on its impact voiced by its supporters and its critics, is that the experimental policy remains defined not by what did happen as a result of all that money-printing and bond-purchasing, but rather by what didn’t happen.
The U.S. didn’t fall off a financial cliff in 2008 and descend into a years-long depression. And (as of today at least) after nearly six years of historically unparalleled Fed stimulus, all that easy money didn’t lead to runaway inflation.
By that less-than-scientific measurement QE has to be judged a success and certainly not a failure, said Peter Cardillo, chief market economist at Rockwell Global Capital Management.
“The economy is growing, the job market is back and, most importantly, the Fed saved us from a much worse disaster in 2008,” Cardillo said.
Instead of a prolonged depression similar to the Great Depression of the 1930s, the U.S. fell into an 18-month recession at the peak of the financial crisis, and the Fed’s interventionist measures -- namely QE -- played a significant role in that, according to Cardillo.
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“QE got us back on a growth track,” he said.
Fed Says QE Helped Labor Markets
For its part, the Fed (not surprisingly) has deemed its experiment a success.
Members of the policy-setting Federal Open Markets Committee said Wednesday in their statement announcing the end of QE that the program, which over the course of its six-year run ballooned the Fed’s balance sheet by more than 400% to $4.4 trillion, had contributed significantly to strengthening U.S. labor markets.
The FOMC said there has been “substantial improvement in the outlook” for U.S. labor markets since QE III, which called for $85 billion in monthly bond purchases, was initiated in September of 2012.
At the time QE III was conceived and spearheaded by former Fed Chair Ben Bernanke, the unemployment rate stood at 7.8%. In September it had fallen to a six-year low of 5.9%. Meanwhile, the U.S. has averaged more than 200,000 new jobs created each month through the first nine months of 2014.
From the very start QE’s supporters said the purpose of the asset purchases -- government issued Treasuries and mortgage-backed securities -- was to stimulate economic activity by pumping cash, i.e., liquidity into frozen markets and by keeping interest rates low on all types of loans from mortgages to car notes.
No Proof It Did But No Proof It Didn’t
Under that broad premise cheap loans would generate demand for goods, which would eventually lead to job creation as companies increased hiring to meet that growing demand.
Slowly, gradually that scenario has played out in the past few years yet QE’s critics argue there’s no empirical evidence that proves QE led directly to stronger labor markets. While that may be true, there’s no proof it didn’t, either.
So once again we’re back to what we know didn’t happen.
Almost since QE was introduced in late 2008 its critics have argued that trillions of surplus dollars pumped into the economy by the government will one day lead to runaway inflation. But that hasn’t happened.
Indeed, the immediate concern right now for monetary policy makers is deflation rather than inflation. Deflation occurs when not enough demand for goods causes prices to fall. That leads to a vicious cycle of low wages, low demand and weak job creation. It can get ugly real fast and the cycle is difficult to break.
There’s a bit of irony attached to the deflation threat.
Deflation Rather than Inflation
For nearly two years the inflation rate has been running about 1.5%, well below the Fed’s target rate of 2%. All that time inflation hawks have been warning that years of the Fed’s easy-money policies are going to catch up to the economy and lift inflation well beyond that 2% mark, at which point inflation rather than recession will be the concern.
Instead, stagnant wage growth has kept prices low and held inflation at a rate well below the Fed’s comfort zone. And with no indication that wages will be rising sharply any time soon, the specter of deflation has replaced the threat of runaway inflation.
For at least one recent Fed dissenter -- Minnesota Fed President Narayana Kocherlakota -- the threat of deflation is more immediate than the threat of runaway inflation, so much so that Kocherlakota voted against the Fed’s decision to end QE in October.
In any event, it will be years before economists and historians can objectively judge QE’s impact on the ongoing economic recovery. And even years of hindsight isn’t likely to end the argument over whether QE had a positive or negative impact.
For now we have to settle on what didn’t happen.