During the 2008- 2009 Great
Recession, the Federal Reserve tried to create stability within financial
markets and spur economic activity. To do this, the Federal Reserve lowered
interest rates. But as the Federal Funds rate neared zero, interest rates remained
high due to fears of insolvency within companies and illiquidity within financial
markets. To solve this divergence in interest rate spreads, the Federal Reserve
pursued unconventional monetary policy such as Quantitative Easing.
Quantitative Easing works by the Federal
Reserve purchasing assets, such as Mortgage-Backed Securities, long-term bonds,
or treasuries, from banks in return for cash. This results in the bank holding
excess reserves that can be loaned out to create economic activity. (When the
bank’s supply of money increases, interest rates go down because banks want to
be able to loan out their money to make a profit.) Quantitative Easing also
allowed the Federal Reserve to create liquidity within financial markets, which
freed up investors capital.
Last week, the chair of The Federal
Reserve Janet Yellen declared the end of Quantitative Easing, as the economy
has improved and unemployment figures have lowered. Though the economy has
improved and interest rates have been at near zero levels for the last four
years, Quantitative Easing has become a controversial issue. Some people
believe that this program has created a bubble in equity markets, and that it
will lead to high inflation and a jump in interest rates after the program has
been ended. The S&P 500 has returned over 130% since the start of QE1. Quantitative
Easing may have helped make stocks an appealing choice to investors because businesses
are able to take advantage of the low interest rates and bonds were had very
small returns, but it is hard to say if Quantitative Easing has created a
bubble in the equities market. The Fed has expanded its balance sheet by almost
$3.6 trillion dollars through monthly asset purchases, but QE should be looked
at as an asset swap rather than an inflationary program. (See link at bottom
for more info) The last criticism, interest rates will jump after this program
has ended, may become true, but the Fed has said that it will keep interest
rates at similarly levels after the end of QE.
Quantitative Easing has not created
economic wonders by creating a fast growing economy, but it may have helped
make the Great Recession less damaging. Yet, there are still many economic side
affects that may come of Quantitative Easing.
During the Great Depression, the
Federal Reserve failed to pump liquidity into the system and help failing
financial institutions. This led to a deflationary spiral and economic
collapse. During the Great Recession, the Federal Reserve did many
controversial things, but it fulfilled its duty of trying to create liquidity
and stability within financial markets.
Here is the link mentioned above: http://pragcap.com/mechanics-qe-transaction
I am still unsure whether Quantitative Easing was a
successful program. Please comment below on what you think or any information
that has led you to view it in a certain way
