With Janet Yellen firmly in the reigns of the world’s largest central bank, many are looking to the legacy left by her predecessor Ben Bernanke. Love or loathe him, Bernanke undoubtedly pioneered a new style of central banking based on large scale direct market intervention, mainly through policies such as quantitative easing. With the policy now being scaled down, it is useful to ask whether QE and more broadly whether the Federal Reserve has been successful in supporting the US recovery.
Hysteresis in the periphery
Recently, financial markets around the world have undergone a sharp correction in response to fears of an eventual tapering in the Federal Reserve’s Quantitative Easing program. The reaction was spurred by Ben Bernake’s, Chairman of the Federal Reserve, comments to the press that QE will be slowed if unemployment falls to 7% and inflation remains within their target. Cautiously this may be sooner than expected as the US economy is beginning to show sustained periods of healthy increases in employment growth.
However, the same cannot be said for the European Union. GDP in countries in the periphery continues to decline, with Italy suffering a 2.4% decline and Greece a 5.6% decline in the first quarter of 2013. Alarmingly it’s Italy’s worst recession in 20 years. With this persistently poor performance, comes the danger of hysteresis.