The End of Quantitative Easing

The End of Quantitative Easing

Glenn C. Fyfe

Webster University BUSN-5620

The End of Quantitative Easing

In October of this year, the Federal Open Market Committee (FMOC) announced the end of a controversial policy referred to as Quantitative Easing (QE) (Sharf, 2014). QE is a policy where the central bank, in our case the Federal Reserve, implements the purchasing of financial assets from commercial banks and other private institutions in an attempt to stimulate the economy where other conventional methods have failed. It is considered by some economists to be a last ditch, unconventional attempt to stimulate a recession or depression economy back to life when central bank policies such as buying or selling short-term government bonds have proven to be ineffective.

Increasing the Money Supply

The Bank of Japan (BOJ) is first credited with using QE as a means to fight domestic deflation in March of 2001. Under QE, the BOJ flooded commercial banks with excess liquidity to promote private lending, leaving them with large stocks of excess reserves and therefore little risk of a liquidity shortage (Wikipedia, 2014). The BOJ first began purchasing government bonds to spurn low interest rates and then later bought asset-backed securities and equities. In similar fashion, the Federal Reserve began a multi-year asset purchase of government bonds and mortgage back securities at a rate of $85 billion per month (reduced to $75 billion in December 2013). In theory, these QE purchases from the commercial banks should have increased the monetary holdings and enabled the commercial banks to provide additional loans to individuals and businesses.  The reason for the halt in QE according to the FOMC, “…. there has been a substantial improvement in the outlook for the labor market since the inception of its current asset purchase program. Moreover, the Committee continues to see sufficient underlying strength in the broader economy to support ongoing progress toward maximum employment in a context of price stability. Accordingly, the Committee decided to conclude its asset purchase program this month.”

The effectiveness of QE is hotly debated and its effect on the economic recovery is questionable. Some credit the various installments of QE with the lower unemployment rates since the 2008 recession began and with the economic growth cited by the Fed as one of the central reasons for terminating QE.  Whether or not the commercial banks used the funding gained from the Feds purchasing of mortgage back securities to increase the amount of loans to the private sector is unclear. The Federal Reserve purchased over $1.0 trillion worth of assets a year and there appears to be no proof that the lion’s share of money that the commercial banks gained from QE was used as the basis of loans to John Q. Public. There seems to be adequate proof that the interest rates have been kept low and that inflation has been low thru the period of time when QE was used. Abundant and low rate car loans have also help created brisk auto sales and renewed vigor in the automotive industry. But little evidence exists that QE has helped the housing market return to the glory days of past or that home loans are abundant and easy to obtain. QE’s main influence has seemed to have the effect of making the rich richer, the poor poorer and has reduced the ranks of the American middle class.