Balas: For QE, Words Are More Important Than Actions
I will have to consult with my statistics textbook for its definition of "tiny." But research (PDF) out this week from the San Francisco Federal Reserve suggests that the economic benefits from the Fed's second round of quantitative easing have been, well, rather small. In fact, the Fed's forward guidance -- in which it pledges a low fed funds rate (which it controls directly) over a sustained period -- has played a bigger role in spurring economic growth.
When the researchers coupled QE2 with the forward guidance, they found gross domestic product was boosted by just 0.13 percentage points following the implementation of that program in 2010. Even this benefit, moreover, seems to fade after two years. Inflation rose by 0.03 percentage point from the combined effects of QE2 and forward guidance.
Without forward guidance, the benefit to GDP would have been a miniscule 0.04 percentage point, and inflation would have risen by just 0.02 percentage point, according to the researchers. By comparison, real GDP in the fourth quarter of 2010 -- when QE2 was launched -- was 1.1%. Core inflation tied to the personal consumption price index, less food and energy, was 0.8%.
In other words, the benefits from Fed communication are larger than the benefits provided by asset purchases. If market participants believe the bond-buying program could increase growth and inflation -- and if the Fed engages in no communication effort -- those views could spark a rise in interest rates. As a result, the central bank provided greater transparency on how long interest rates would stay low, particularly via the Fed-controlled fed funds rate. Because investors expected an eventual increase in the fed funds rate further off into the horizon, longer-term interest rates were brought down.Recall that interest rates over longer maturities are affected by shorter-term rates. If I am an investor with, say, a 10-year time horizon, I can buy one 10-year U.S. Treasury bond, or I can buy a succession of shorter-term bonds and roll them over on maturity. Since the longer period carries a greater risk that interest rates could change, longer-term interest rates generally tend to yield more, reflecting the term premium.
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