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THE US Federal Reserve announced on Wednesday that it would halt the bond-buying programme known as quantitative easing (QE) – one of the biggest experiments in economic policy ever attempted.
The policy was a gamble, and it’s too soon to be sure of the results. Nonetheless, the Fed was right to take the risk. The Fed confirmed that it will cease the monthly bond purchases that it began in September 2012, the third round of its effort to invigorate a weak recovery.
This doesn’t mean the programme is over. The Fed still holds more than $4 trillion (R43.4 trillion) in bonds, roughly a fifth of all US Treasury and mortgage-backed securities outstanding. Until they are divested – a challenge in its own right – these vast holdings will continue to have an effect on markets. Exactly how much QE has helped the economy remains a matter of debate.
Former Fed chairman Ben Bernanke said in 2012 that the Fed’s first two rounds may have boosted output by 3 percent and added more than 2 million jobs.
In a more recent paper, San Francisco Fed president John Williams said such estimates were uncertain.
Some believe QE has gradually diminishing effects; others that it has no positive effect at all. Regardless, the gamble was justified. After the crash a persistent slump in demand hobbled the recovery and drove up long-term unemployment, threatening great and lasting economic damage. With inflation low, the risks of QE were small in relation to the possible gains.
The benefits were not confined to the direct effects of the Fed’s purchases: Even more important, QE bolstered confidence that the central bank was willing to do everything in its power to revive the economy.
If there is cause for regret, it is not that the policy was undertaken, but that it ever had to be.
After the initial fiscal stimulus, which was smaller than required, Congress moved too soon to fiscal stringency, and compounded that error by cutting the deficit in needlessly damaging ways. When it came to supporting demand, the Fed had to do it all – and, with interest rates already at zero, that meant QE.
The second regret is that regulators have not done more to protect the economy from the financial instability the Fed’s policies might engender. The Fed’s efforts to make banks finance themselves with more loss-absorbing equity are a step in the right direction.
The QE experiment will not be over until the Fed’s balance sheet is brought back to normal, and in the meantime the extra risk of financial instability is there. Nonetheless, the verdict stands: Conditions demanded that the Fed be bold, and it was. It did the right thing.