The Federal Reserve’s large-scale asset purchases between 2009 and 2014 may have done little to move the US economy out of recession and into lasting recovery, research suggests. As long-term economic stimulus, quantitative easing may also have been a bust, according to findings presented at Chicago Booth’s US Monetary Policy Forum.
The study has implications for central bankers and investors around the world. Japan is still counting on large-scale asset purchases to goose its sluggish economy. In the United States as well as the United Kingdom and other countries in Europe, investors are worried that stock prices will fall, and economic growth will slow, as central banks sell back the massive pile of assets they purchased.
Bond buying or selling by central banks seem to have limited lasting market effects, write Morgan Stanley’s David Greenlaw, University of California at San Diego’s James D. Hamilton, Bank of America Merrill Lynch’s Ethan S. Harris, and University of Wisconsin-Madison’s Kenneth D. West. Looking at the Fed’s asset purchases, the researchers find a modest long-term effect on bond yields, the key factor central bankers hoped to manipulate for economic growth. The Fed’s ongoing sales of these assets will not seriously affect market prices in the long run, the research suggests, even when a sale announcement sparks immediate market reaction.
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Was Unconventional Monetary Policy a Success?The findings contradict conventional wisdom among monetary-policy experts. A consensus proposes that large-scale asset purchases reduced 10-year Treasury yields by about one percentage point, as reported in the study. (Low bond yields stimulate growth by making borrowing cheaper, which encourages businesses and consumers to spend money.) Generally, most experts view lowering of bond yields as the gateway through which quantitative easing affects the US economy, which today is characterized by low unemployment and healthy housing markets.
The study includes recommendations for the Fed to speed up its asset sales, and to avoid the practice of buying assets as economic stimulus in the future.
The researchers analyzed changes in bond yields each day the Fed made news, such as when the Federal Open Market Committee released minutes, or Fed governors gave policy-related speeches. This forward guidance, as it’s called, was a key component of the Fed’s strategy, designed to convince investors that the Fed would keep their bond investments safe with low inflation rates in the long run. The researchers also focused on days that Reuters attributed a significant bond-yield move to news from the Fed.
Surprises by the Fed, such as its first announcement of quantitative easing, sparked immediate buying in the bond market, according to news reports and many studies. But yields tended to rise—investors sold bonds—the next time the Fed made news, according to Greenlaw and his colleagues. The researchers do not attempt to establish why, but they note one possibility: investors may have eventually decided that they had overreacted to the big news.
Events and announcements seemingly unrelated to the Fed sometimes moved markets even as the Fed was making news, the study finds. As an example, the researchers analyzed the infamous taper tantrum of 2013, when bond yields jumped after Fed Chairman Ben Bernanke indicated that the central bank would soon be winding down its asset purchases. They conclude that good news about the economy was a bigger trigger for that selling.
“Our overall conclusion is that the size of the Fed’s balance sheet is less potent in moving the bond market than as perceived by many and should not be viewed as a primary tool of monetary policy,” the researchers write. They suggest that the Fed stick to manipulating short-term interest rates, its traditional role in economic stimulus.
The Fed first adopted quantitative easing in 2009, at a time when short-term interest rates were too low to cut. The controversial program kicked in as banks were failing, unemployment was rising, and housing markets were in shambles.
After nearly a decade of often contradictory research results, a consensus emerged that the policy did moderately stimulate the economy, without sparking worrisome inflation. While not disputing that the policy had an effect, Greenlaw, Hamilton, Harris, and West contend that a common research approach to the topic, one that focuses only on market changes when the Fed announced big surprises, overstates the impacts of the asset purchases.
David Greenlaw, James D. Hamilton, Ethan S. Harris, and Kenneth D. West, “A Skeptical View of the Impact of the Fed’s Balance Sheet,” Working paper, February 2018.
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