The US Quantitative Easing experience
Empirical results would argue that the Japanese Quantitative Easing (QE) program did not work. This inexplicably has not stop central bankers globally from adopting the program. The US’s Federal Reserve (the Fed) was one such central banker to turn to QE. So what have they done, does it differ from Japan, and could there be a more positive outcome for the US than Japan?
What the US has done
Following the Global Financial Crisis the US Federal Reserve cut its federal funds rate (its interest rate) range to between 0 – 0.25% and has kept it at this since 2008. This meant it faced a similar problem to the one Japan faced in 2001 – it had made short run debt as cheap as it could and this was not enough. The Fed, just like Japan, decided they needed to make long term debt cheaper to stimulate some economic activity. So, at the same time as the Fed hit its lowest federal fund bound it started its first bond buying program that is stated would last 6 months, later named QE1.
QE1 involved the Fed buying $600 billion in mortgage-backed securities, 6 months later the Fed owned $2.1 trillion in financial institute debt. Many critics at the time warned this would cause inflation Against precarious growth and none of the warned inflation, QE2 was launched. At this time it seemed the US like Japan was on the QE drug and could never stop. QE2 involved buying efforts to maintain the Fed’s debt holding of $2.1 trillion. To achieve this, the Fed bought $30 billion in two- to ten-year treasury notes every month until September 2012. Much of this money went to foreign banks. Growth was still not where it needed to be and unemployment was becoming an issue. The Fed was expected to do something so they launched QE3 where the Fed entered into open-ended bond purchasing program of agency mortgage-backed securities treasury notes, etc. This was markedly different from QE1 and QE2 because the Fed did not give a cut off period stating it would last as long as necessary, building credibility for the program. It also targeted domestic banks and foreign banks.
Differences from Japan
After the launch of QE1 Ben Bernanke (then Fed Chairman) stated that the Fed’s program “conceptually distinct from quantitative easing (QE), the policy approach used by the Bank of Japan from 2001 to 2006.” Overall the program has differed from Japan though the differences are starker in QE3 than the QE1 or QE2. The key difference is the focus on a mix of loans and securities that affect credit conditions for households and businesses. Whereas Japan focused on its quantity of bank reserves, which are liabilities of the central bank and mostly affect financial markets. Meaning the effect on Japanese households was incidental.
The Outcome
As with all QE program the actual effect has been difficult to pin down. The Fed and its supporters say the purchases have held down costs of household and firm debt, leading to faster job growth. Critics say the Fed has aggravated economic inequalities by helping financial markets and not the rest of the economy. What is true is the Fed now holds $4 trillion debt making this the largest ever QE program. It has also enabled one of the longest bull markets in American history.
In 2013 the Fed announced it would taper QE3. Much like many economies that have attempted to exit QE (the US itself has tried twice), this was pushed out to October 2014. Over the QE period the American economy has outperformed other parts of the world hit by the GFC and kept its dollar down. Return to trend inflation has not yet occurred but employment growth is strong. The US since the taper has been unsteady however some economist are predicting a rate rise in September 2015.The fact that the conversation has moved on to whether or not there should be a rate rise instead of discussion about a return to QE is a victory for the Fed.