Is Quantitative Easing Working?
Following an increase in interest rates, econobloggers question the Fed's policy
Ben Bernanke's second round of quantitative easing (aka QE2), intended to stimulate the economy, is coming under review following a spike in interest rates. Since the goal of QE2 is to boost employment and lower interest rates, some are wondering if the interest rate rise means the policy has failed. Is the Fed's policy working or not?
- Yes: It's Working, writes Jeremy Siegel at The Wall Street Journal. "The rise in long-term Treasury rates does not signal that the Fed's policy has backfired," but rather "is a sign that the Fed's policy is succeeding." Here's why:
Long-term Treasury rates are influenced positively by economic growth--which encourages consumers to borrow in anticipation of higher incomes and causes firms to seek funds to expand capacity--and by inflationary expectations. Long-term Treasury rates are affected negatively by risk aversion: Seeking a safe haven, investors pile into Treasury bonds, running up their prices and lowering their yields. The Fed's QE2 program has raised expectations of growth and inflation, sending long-term Treasury rates up. It has also lowered risk aversion, which implies rising long-term rates.
- Ditto That David Beckworth at Macro and Other Market Musings, with a graph, seconds the notion that "inflation expectations pick up first and eventually the real interest rate does too." The Economist's Ryan Avent appears to concur, calling "fears" over the quantitative easing policy "somewhat misplaced" and reminding all that "reduced bond yields are not the Fed's goal. The Fed's goal is to facilitate recovery."
- Are You Kidding? Quantitative easing skeptic John Cochrane at Vox EU disagrees, suggesting "all that quantitative easing ... does is ... restructure the maturity of US government debt in private hands." He asks readers to take a real look at the quantitative easing arguments:
Now, of all the stories you've heard why unemployment is stubbornly high, how plausible is this: "The main problem is the maturity structure of debt. If only Treasury had issued $600 billion more bills and not all these 5 year notes, unemployment wouldn't be so high."
- Why Higher Interest Rates Are Problematic Niel Irwin at The Washington Post explains:
The climb in interest rates is confounding the Fed's efforts as it tries to bring down rates by buying $600 billion in Treasury bonds. The central bank affirmed that it would stay on course with those plans Tuesday after a policy meeting... If the higher rates persist, or rise further, it would both lean against economic growth and make it that much more expensive for the federal government to finance its debt.
- Nonsense: We're on the Road to Recovery, writes economist Brad DeLong:
The Fed's aim is to make rates lower than they would otherwise be and so raise economic growth and eliminate any threat of deflation. Rates are still remarkably low. They are rising because of a jump in real rates that almost certainly reflects improved prospects for growth. I would imagine that the Fed is pleased with the picture it sees before it. ... Are long-term interest rates likely to rise still further? Definitely. ... In all, what has happened in bond markets is encouraging. Rates are rising, as depression psychology dwindles. With luck, the recovery is going to take hold.