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Quantitative easing is over. Did it work?

Janet Yellen and the FOMC are shutting down the proverbial printing presses.
Janet Yellen and the FOMC are shutting down the proverbial printing presses.
Mark Wilson/Getty Images

It's the end of an era at the Federal Reserve. Today, the central bank's open market committee said it is ending its QE3 program, in which it made massive purchases of mortgage-backed securities and treasuries every month in an effort to prop up the economy.

That makes it as appropriate a time as any to look back and ask: did QE3 work?

Yes, but proof is hard to find

So let's start with the basics: it's very, very hard to know exactly to what degree QE3 worked.

"It's difficult to tell," says Paul Edelstein, an economist with IHS insight. He points out that major economic indicators like job growth and homebuying all rose during the QE3 era (or held relatively steady, in the case of GDP growth), but of course that doesn't directly prove causation.

Since QE3 was announced in September 2012, for example, the unemployment rate has fallen from 7.8 percent to 5.9 percent. The pace of monthly job growth has slowly accelerated. And the stock market has soared to new heights.

All of those could well be products of easing. Quantitative easing is supposed to work via a number of routes — it lowers the yield on bonds, sending people into other assets, particularly stocks. So easing boosts the stock market. And it lowers longer-term interest rates, with the purpose of encouraging business borrowing and homebuying. Because it's an indirect and unwieldy option, it is often referred to as a "blunt tool" — the Fed can encourage growth to happen, but it can't really directly cause growth to happen.

Still, most economists agree that the program did work via its indirect routes.

"I don't think it's a straight line — you've got to change planes in Atlanta first," says Greg McBride, senior financial analyst at "There's a relationship there. QE3 incentivizes risk-taking. It helps keep interest rates low."

And QE3 did something extra to incentivize risk-taking. What separated QE3 from earlier bond-buying programs was that it was both monthly and open-ended. While QE2 involved a big $600 billion purchase of long-term treasuries, QE3 involved $85 billion per month in large-scale asset buys (a total that the Fed has been tapering downward). Because the Fed left it open-ended, it made it clear that the central bank was willing to keep its foot on the stimulus gas pedal until the economy looked healthier.

Inflation never really happened

One of the biggest fears of QE was that all of this "money-printing" would cause hyperinflation. That still hasn't happened. The latest reading of personal consumption expenditures inflation (the measure the Fed looks at) is only at around 1.5 percent, well below the Fed's stated threshold of 2 percent. And that's not really changed, either, since QE3 began.

FRED PCE infltaion

Source: St. Louis Federal Reserve Bank

What if there had been no QE3?

One key thing to consider with QE3 is the counterfactual — what would the economy have looked like had it never been put into place?

One of the big benefits of QE3 was that it counteracted a Congress that insisted on holding back spending, even while the economy was sluggish. As Fed Chair, Bernanke was constantly chiding Congress for dragging on the economy, encouraging them to save deep spending cuts like those under sequestration for later.

So though 2013's economic growth wasn't exactly stellar compared to 2012's, it's important to consider how bad it could have been, says Edelstein.

"I mean, 2012 GDP growth was two and a quarter percent. 2013 comes, we have all the sequester-related spending cuts, and we have QE3. The result: GDP growth of two and a quarter percent," he says. "Is two and a quarter percent good? Not really. But clearly again it could be a lot worse if we didn't have fiscal drag."

So what now?

Inflation is still low, and the economy is still not at full employment. That means there's a good argument that the Committee should listen to Minneapolis Federal Reserve Bank President Narayana Kocherlakota and keep QE around. Indeed, while the point of QE is to drag bond yields down, in the long run they should climb again, even given this extra stimulus, says Edelstein.

"If QE works, long-term interest rates should actually go up. Because if QE works, then expectations for growth and inflation and the actual timing of the Fed having to raise interest rates, those should improve, which pushes up bond yields," he says.

That hasn't happened yet. The yield on the 10-year treasury has started to drop again after a 2013 climb.

Fred 10 year treasury

Source: Federal Reserve Bank of St. Louis

But there is still some stimulus — the Fed is continuing its near-zero interest rate policy, with the assurance that if there's room for it, it will keep those rates down for a while — "especially if projected inflation continues to run below the Committee's 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored," said today's statement.

Moreover, QE is now in the Fed's toolbox. So not only could the Fed keep low interest rates for long into the future; it could easily do much more bond-buying as it sees fit.

"The fact that inflation is still low is something that does help the Fed keep interest rates at low levels longer than would otherwise be expected," says McBride. "If inflation went dangerously low — if you saw inflation go below the 1% mark — fire up the printing presses, because here comes QE4."