The impact of Federal Reserve quantitative easing in 2010-2011, like many economically stimulative programs, is hard to measure. What we can we say about the most recently completed round of stimulus really can only be based on what the expectations for stimulus were and whether those expectations were met.
How Expectations Were Set in Jackson Hole 2010
The present round of monetary policy loosening began shortly after Fed Chairman Bernanke’s speech in Jackson Hole, Wyoming in August 2010. Markets reacted favorably, with all major indexes rising with the announcement and subsequent implimentation of asset purchases. Early on one could argue that the impact of Federal Reserve quantitative easing was to increase stock and bond prices – an unusual event for long-time market watchers. One can think of it as a rising tide of funds lifting all boats (assets) in the ocean.
Clearly rising asset prices combined with relatively low interest rates were desirable, and in this regard the impact of Federal Reserve quantitative easing has to be called a success. On the other hand however, the great problems associated with trying to implement economic policy is that markets are fluid, information is delayed and often inaccurate, and unintended consequences rise out of large scale policy decisions.
The Negative Impact of Federal Reserve Quantitative Easing
Among the several undesirable consequences of the Fed’s asset purchases was the unexpected flow of funds into commodities products such as grain/corn, oil, and precious metals (gold, silver, and some rare earths as well). The resultant swell in demand for these commodity items (oil in particular) both raised the national trade deficit as well as causing a spike in inflation. It is unfortunate that much of the inflation spike in commodity assets came as a result of investor speculative demand in anticipation of high inflation. Students of economics will tell you that the expectation of inflation alone is enough to create it – and this case is no different.
This anticipatory increase in particular asset prices has had firmly negative consequences elsewhere – namely in the form of consumer confidence (or lack thereof). Reduction in expected consumer demand has led to business cut-backs, effectively zero job creation, and negative credit expansion. It is here where it becomes evident of the greatest failing or lack of impact of Federal Reserve quantitative easing can be seen.
For all the blessings of the Treasury bond purchases by the Fed and the resultant low long term interest rate environment it has created, there are effectively no new jobs and the housing / real estate market is still hanging by a thread. While it is unclear what the economy would have looked like without more stimulative policy, it is clear that the actions that were taken did not result in achieving the most important goals of the program: business and consumer confidence.
It is my belief that the Fed has no choice but to initiate another round of Quantitative easing, however it is also my expectation that they will try to learn from their mistakes and try something different.