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Assessing quantitative easing
Muzzled
Aug 13th 2009 | WASHINGTON, DC
From The Economist print edition
Politics stops the Fed from expanding an asset-purchase scheme
BACK IN 2002, before he became chairman of the Federal Reserve, Ben Bernanke claimed that if short-term interest
rates fell to zero, a central bank still had the ultimate weapon: printing money by purchasing government bonds.
Having now actually tried quantitative easing himself, Mr Bernanke is discovering its limits.
In March the Fed announced plans to purchase $300 billion of Treasury debt by September with newly printed money
(to be more precise, electronic money in the form of bank reserves) and to more than double planned purchases of
mortgage-related debt to $1.45 trillion. The $300 billion in Treasury purchases, in particular, were widely assumed to
be the start of a much more substantive plan. Yet the Fed’s latest policy meeting wrapped up on August 12th without
any plans to expand either scheme, although it did move the completion date for Treasury purchases back to the end
of October and kept the option of boosting purchases later. It left its short-term interest-rate target at zero to
0.25%. Such inaction contrasts with the Bank of England’s decision on August 6th to expand its programme of asset
purchases, mainly of government bonds, from £125 billion ($206 billion) to £175 billion.
Comparisons are inexact. The Fed has been intervening more aggressively than the bank in other ways. The
programmes also have different rationales. The Fed emphasises the ability of bond purchases to lower yields and
improve liquidity in private debt markets. The Bank of England says its programme aims to boost spending by
putting more money into the economy.
Analysing the programmes’ precise impacts is also tricky. Government-bond yields in both Britain and America
initially fell sharply on the announcement of the asset-purchase programmes, which are substantial relative to GDP
(see chart). Yields have since retraced that drop in Britain and bounced higher than before in America. But lots of
factors are at play. Expected inflation (as implied by the gap between conventional and inflation-indexed bond yields)
has risen. The fear of global meltdown that drove investors to the safety of governments bonds has ebbed.
Nevertheless, an IMF study estimates that Britain’s longer-term yields are 40-100 basis points lower than they would
have been without the bank’s purchases.
The impact on private yields is also probably positive. Macroeconomic
Advisers, a consultancy, estimates that American mortgage rates are a
percentage point lower relative to Treasuries as a result of the Fed’s asset
purchases. The Bank of England takes some credit for a narrowing in
corporate-bond spreads. The European Central Bank says the announcement
of plans to buy €60 billion ($85 billion) of covered bonds has helped revive
new issuance and bring down spreads.
If the programmes are doing some good, why is the Fed not expanding
them? The outlook has improved, for one thing: America’s economy is
levelling out, it noted on August 12th. But the main reason is political, not
economic. The Fed’s Treasury-purchase plan prompted charges that it was
inviting hyperinflation and had subordinated itself to the government’s deficit
needs. Alan Greenspan, a former Fed chairman, says inflation will exceed
10% if the Fed fails to shrink its balance-sheet and raise rates, and 3% for a
time even if it does.
Needless to say, that is not the Fed’s view: it still foresees rising unemployment and falling inflation. But many
officials have concluded that, for now, the benefits of buying more Treasuries do not outweigh the costs of a
damaging rise in inflation expectations and a perceived loss of independence. Even the ultimate weapon is useless if
you are too nervous to use it.
Copyright © 2009 The Economist Newspaper and The Economist Group. All rights reserved.
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