The jury's still out on how history will treat the Federal Reserve's unprecedented stimulus program.
After the central bank pushed its main policy rate to zero in December 2008, it started buying hundreds of billions of government debt and mortgage-backed securities to keep longer-term interest rates low. That became known as quantitative easing.
The real punch of the strategy wasn't in the quantity of money the Fed was putting in the banking system. It was in the amount of bonds it was taking out of the market, which forced yields down. Total assets on the Fed's balance sheet today stand at $4.5 trillion compared with $891 billion at the end of 2007.
Some argue the policy brought the U.S. economy closer to full employment and helped stimulate growth. Others say it exacerbated inequality by inflating the prices of financial assets. At the very least, we can say it created some winners and losers, using data from a batch of papers released this morning from the Brookings Institution. (Ben S. Bernanke and Donald Kohn, the former Fed chairman and vice chairman, are both Brookings fellows.)
- Middle-aged, middle-class households, according to a paper by Matthias Doepke, Veronika Selezneva and Martin Schneider. These folks are more likely to have mortgages, and as borrowers they'd benefit from lower interest rates as well as policies that boost inflation. For example, a woman takes out a fixed-rate mortgage to buy a home. As inflation rises over time, the value of the house increases while the cost of the debt does not.
- The equity class. Households that owned financial assets, especially stocks, made out very well thanks to QE. Markets tend to react positively to expansionary policy, and lower interest rates also send more people into the stock market in search of higher returns. The stock market more than doubled from when the Fed started its first round of quantitative easing back in 2008 through the end of asset purchases in October. "Generally, the higher the income level, the greater the exposure to the financial markets in general and equity markets in particular," said Carl Riccadonna, chief U.S. economist at Bloomberg Intelligence.
- Wage-earners also benefited, according to a paper by Josh Bivens, research and policy director at the Economic Policy Institute. He writes that criticism that quantitative easing exacerbated inequality is "misplaced," especially considering what the economy might have looked like if the Fed hadn't stepped in. "As weak as wage growth has been since the onset of the Great Recession, it would have been much weaker if monetary policy had been less expansionary," he wrote in the paper distributed by Brookings. "Wage gains that are realized when expansionary monetary policy keeps unemployment lower than it otherwise would have been are not reversed if monetary policy does not contract before the economy is stabilized near full employment."
- Lenders. As inflation helps borrowers, it hurts creditors. The dollars they lent out earlier could have bought more in value than that same amount they'll get back after inflation sets in.
- Wealthy retirees, who tend to have their savings in bank accounts and bonds, according to Doepke, Selezneva and Schneider. When interest rates are cut, the amount of money they earn on those savings gets reduced. They're also likely to be living off a fixed income, so policies chasing higher inflation decrease their purchasing power.
- Poor and young households are less likely to own homes and have comparatively lower debt burdens, so they wouldn't be able to take advantage of lower interest rates, the three authors wrote. Meanwhile, higher inflation makes buying everyday goods that much more expensive, especially if their incomes aren't rising commensurately.
To be sure, the issue is nuanced. In the end, the record will probably be kind to quantitative easing, said Bloomberg's Riccadonna.
"You had equity markets benefit from QE, but eventually QE also jump-started the broader recovery," he said. "Ultimately everyone's benefiting."