The U.S. economy has recovered enough to be weaned off a huge stimulus program. The Federal Reserve has spent trillions buying up assets to stimulate the economy in what’s known as quantitative easing. Ending the program is a sign of a healthier economy, but it brings its own dilemmas. CCTV America’s Daniel Ryntjes reports.
The $3.5 trillion economic stimulus of quantitative easing or QE began under former Fed Chair Ben Bernanke. He wanted to put more downward pressure on the cost of borrowed money after bringing the Federal Funds Rate, which is the interest rate at which depository institutions lend balances to each other overnight, down to near zero.
“I think he’s done a good job in creating a new weapon, if you will, to fight against recession and slowdowns in the economy. Prior to this, the assumption was all we could do was lower the Federal Funds Rate, but we see now that there’s something else we can do,” said Rohan Williamson, a professor at the McDonough School of Business at Georgetown University.
Since the Fed launched its third quantitative easing, known as QE3, on treasury bonds and mortgage-backed securities, the unemployment rate has dropped from more than eight percent to below six percent. However Williamson said the correlation between unemployment rates and quantitative easing is not clear.
“I’m sure there’s probably some connection, but to credit all of it to quantitative easing may be a little bit strong, because we’re not sure. Because there’s some natural changes in economies anyway, and it could be the case that quantitative easing maybe speeded up things a little bit,” Williamson said.
At the Fed meeting this week, members of the rate-setting committee indicated it will be a “considerable time” before members consider raising short-term interest rates. And economists said the Fed chaired by Janet Yellen, is not compelled to do so because U.S. inflation remains fairly low.
“The logic of the inflation data would suggest to the Fed that they have more time to prepare for the eventual liftoff. If you add that to the fact that you have had all this market dislocation, you can make an argument that the Fed may go slower, rather than faster, which the market has already assumed,” said Cary Leahey, a senior advisor at Decision Economics.
In its latest closely watched statement, the committee indicated it’s encouraged by recent jobs data and sees “sufficient underlying strength in the broader economy.”
Federal Reserve ends quantitative easing programThe U.S. economy has recovered enough to be weaned off a huge stimulus program. The Federal Reserve has spent trillions buying up assets to stimulate the economy in what’s known as quantitative easing. Ending the program is a sign of a healthier economy, but it brings its own dilemmas. CCTV America’s Daniel Ryntjes reports.
Quantitative easing had winners and losers
In late 2008, the Federal Reserve announced it would be buying $600 billion worth of mortgage-backed bonds. It was the first round of quantitative easing launched at the height of the financial crisis in order to promote investor confidence.
Following the first round of QE there were two more extraordinary monetary measures, one in 2010, and another in 2012 that is now winding down.
Traders said the moves helped push down interest rates on treasuries and other assets, which caused investors to flee to riskier but higher yielding assets.
“We saw a rally in the U.S. equity market, but we also saw money flow to the emerging markets both in terms of sovereign debt and other instruments because their interest rates had not caught up yet to the developed world,” said Keith Bliss, Senior Vice President at Cuttone & Co.
Bliss also said the central bank’s easing primarily benefited one class of investor.
It’s really the ultra-wealthy who have made investments in capital assets that enjoyed that rapid ascent in capital markets, Bliss said.
The number one loser are retirees who don’t have money in a lot of equity instruments and had most of their money in savings because they’ve had no return on their assets right now, he added.
The Federal Reserve had hoped that QE would boost the incomes of a greater swath of Americans, but wages have barely kept up with the rate of inflation and growth has been sluggish.
That’s partially why the Fed is committed to keeping interest rates low for a while in the hopes more businesses will take out loans to boost production, hiring and wages.
Quantitative easing had winners and losersIn late 2008, the Federal Reserve announced it would be buying $600 billion worth of mortgage-backed bonds. It was the first round of quantitative easing launched at the height of the financial crisis in order to promote investor confidence.
For more on the impact of the Fed’s QE stimulus program, CCTV America’s Michelle Makori interviewed David Nelson, the chief strategist of Belpointe Asset Management and John Herrmann, director of U.S. rate strategies at Mitsubishi UFJ Securities.