Fed Economists See QE Offering at Best Moderate Growth Boost
The Federal Reserve’s unprecedented expansion of its balance sheet known as quantitative easing has probably given a more limited boost to the U.S. economy than previously estimated, two regional Fed economists said.
“Asset purchase programs like QE2 appear to have, at best, moderate effects on economic growth and inflation,” Vasco Curdia, an economist at the San Francisco Fed, and Andrea Ferrero, an economist at the New York Fed, said in a research note released today. “Communication about the beginning of federal funds rate increases will have stronger effects than guidance about the end of asset purchases.”
Chairman Ben S. Bernanke said June 19 that the Fed may begin reducing asset purchases later this year and end them around mid-2014 if the economy improves in line with officials’ expectations. The central bank will keep “a high degree of monetary accommodation” in place for “an extended period” by keeping interest rates near zero after the purchases end, Bernanke said in congressional testimony last month.
Bond buying and communications of the future course of policy have formed the two pillars of record Fed accommodation since the central bank cut the benchmark interest rate to zero in December 2008.
A program approximating the second round of bond buying by the Fed, which amounted to $600 billion, probably would provide a 0.13 percentage point boost to real gross domestic product, fading after two years, and a 0.03 percentage point increase to inflation, the economists said. That’s about half the benefit to growth from a 0.25 percentage point interest rate reduction, they said.
Zero Rates
The study assumed the stimulus program would last five years, with the Fed purchasing the bonds in the first year, holding them for two years and selling off the assets during the final two years. The study also assumed the Fed would pledge to keep rates at zero for the first four quarters of the program.
A commitment to keep interest rates at zero for longer would increase the benefits for the economy, Curdia and Ferrero said in the paper released by the San Francisco Fed.
The Fed last month repeated its pledge to keep rates near zero as long as unemployment is above 6.5 percent and inflation doesn’t exceed 2.5 percent.
A previous study estimated that the second round of quantitative easing may have bolstered gross domestic product by 3 percentage points and pushed up inflation by 1 percentage point, Curdia and Ferrero said. The probability that the impact from the bond buying was that large is “negligible” because there is little evidence that a large percentage of investors buy only long-term bonds, they said.