Did QE Work?


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. The central bank is expected to announce the end of the program, known as Quantitative Easing, when it concludes a two-day policy meeting this week. So did QE work? To answer that question, we have to review 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 consumers and companies to refinance their higher interest debt, thus reducing monthly payments and improving monthly cash flow.

There have been a few couple of criticisms of QE, including that it artificially boosted stock prices because investors were dissuaded from investing in bonds; it penalized savers, who have been staring at zero percent rates on their savings, checking and CD accounts; and it will ultimately lead to rampant inflation and a weaker US 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 US economy to date – in fact, recent reports point to a slowdown in prices, not an acceleration.

QE may not have been the perfect policy solution, but in an environment where the government was a roadblock (anyone who thinks that austerity would have been 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.

MARKETS: Investors snapped a four-week losing streak, as earnings took center stage. With 208 S&P 500 companies reporting, the index is on track for 5.6 percent earnings growth from last year, according to FactSet. That compares with expectations for 4.5 percent growth before earnings season started.

  • DJIA: 16,805 up 2.6% on week, up 1.4% YTD
  • S&P 500: 1964, up 4.1% on week, up 6.3% YTD (largest weekly percentage gain since Jan 2013)
  • NASDAQ: 4483, up 5.3% on week, up 7.4% YTD (largest weekly percentage gain since Dec 2011)
  • Russell 2000: 1118, up 3.4% on week, down 3.9% YTD
  • 10-Year Treasury yield: 2.27% (from 2.2% a week ago)
  • December Crude Oil: $81.01, down 1.3% on the week (4th weekly loss, down 20% from June)
  • December Gold: $1231.80, down 0.6% on the week
  • AAA Nat'l average price for gallon of regular Gas: $3.06 (from $3.31 a year ago)

THE WEEK AHEAD: With worries about global growth slowing down, investors are eagerly awaiting the first estimate of third quarter growth. The economy likely expanded at an annualized rate of 3 percent, which would be down from the Q2 reading of 4.6 percent, though an improvement from the 2.2 percent pace averaged so far in this expansion.

Mon 10/27:

Amgen, Merck, Twitter

10:00 Pending Home Sales

Tues 10/28:

Dupont, Facebook, Pfizer, Sirius/XM

8:30 Durable Goods Orders

9:00 S&P Case-Shiller HPI

10:00 Consumer Confidence

FOMC Meeting Begins

Weds 10/29:

Hershey, Kraft, Visa

2:00 FOMC Meeting Announcement (no presser)

Thurs 10/30:

Conoco Phillips, GoPro, Kellogg, LinkedIn, Mastercard, Time Warner Cable

8:30 Weekly Jobless Claims

8:30 Q3 GDP – First Estimate

Fri 10/31:

Chevron, Exxon Mobil

8:30 Personal Income and Spending

9:45 Chicago PMI

9:55 Consumer Sentiment