Traders in the 10-year Treasury note pit at the Chicago Board of Trade use hand gestures to signal transactions in the closing minutes of trading on August 5, 2003 in Chicago, Illinois. ( Photographer: John Zich/Bloomberg News)

A Decade On: What's the Verdict of America's Era of Easy Money?

(Bloomberg) -- Last week marked a decade since the advent of post-crisis unconventional monetary policy: The Federal Reserve announced its first round of large-scale bond buying on Nov. 25, 2008.

Those initial purchases were followed by two more rounds, paired with years of market hand-holding and near-zero rates. Ten years and one long U.S. expansion later, economists are asking how well the innovations in monetary policy worked.

Research suggests a mixed record. On one hand, economists credit mass bond-buying campaigns and promises of lower-for-longer with helping to supplement rock-bottom rates to stave off a global Great Depression 2.0. On the other, that recovery proceeded in fits and starts, and it isn’t clear how much benefit bond buying in particular carried.

“During the past decade, forward guidance has generally been viewed as an effective policy tool to support the economic recovery,” San Francisco Fed Executive Vice President Glenn Rudebusch wrote in an Economic Letter this week. The economic impact of quantitative easing “is still debated.”

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Morgan Stanley’s David Greenlaw, Bank of America Merrill Lynch’s Ethan Harris and other co-authors argued in a paper this year that the effects of the bond-buying program were “likely more modest than generally claimed.” They say Fed actions weren’t a “dominant” determinant of 10-year yields and whatever effect they did have wasn’t usually persistent.

On the other side of the debate, Joseph Gagnon of the Peterson Institute for International Economics and D.E. Shaw’s Brian Sack recently made a case that the central bank’s total bond-buying program was equal to a significant rate reduction. They argue the expansion of the first QE round from $600 billion to $1.75 trillion in March 2009 was the equivalent of a 1.25 percentage point cut in the federal funds rate.

More on This Topic:

  • Fed staff find that the two earlier QE programs probably had a bigger effect because markets were strained or “there was greater scope for signaling more accommodative intentions with respect to the federal funds rate.”
  • The Brookings Institution asks: if QE lowered long-term rates by about 1.5 percentage points, as some estimates suggest, why hasn’t ongoing balance-sheet runoff lifted them by more? Communication is key, Sage Belz and David Wessel argue. The Fed made clear tightening would happen in the background, alongside slower rate hikes.

Where you come down on unconventional policy depends largely on how you measure it. It’s sure to be a topic of continued debate, both because the Fed has indicated that it remains in the toolkit for the next recession and because the European Central Bank is only now slowly backing away from its program.

Also worth a read this week…

Attending elite colleges provides a bigger boost for women than for men, based on this new National Bureau of Economic Research working paper. Once you control for the characteristics of the people who get into the schools, later-in-life advantages essentially disappear for men. Women, by contrast, earn more and are more likely to participate in the labor market in their late 30s if they’ve gone to more selective schools.

Higher deficits came alongside improving corporate profitability in the recession era, new International Monetary Fund research shows. A fiscal impulse that increased the structural deficit by 1 percent of potential gross domestic product is associated with a rise in the ratio of corporate profits to assets of around 0.3 percentage point -- enough to be potentially “instrumental in raising subdued private investment.” That means government spending can be an effective salve when central banks are low on crisis-fighting ammunition. The authors look at financial statements for 52 advanced and emerging economies in 2009 and 2010.

UBS Global Economic Outlook 2019-2020 (available to UBS research subscribers)

The idea that this business cycle is entering its final innings doesn’t hold up empirically, UBS economists say. Looking at 40 countries over about four decades, they determine that data in the U.S., euro area and Japan are behaving in ways inconsistent with prior peaks. “We never have employment growth accelerating sharply into a recession as employment is doing in Japan,” the write. And U.S. housing indicators “normally fall much more sharply” just before a decline.

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