There is almost nothing that can be said at a meeting of Federal Reserve economists that will garner much attention in the week before a midterm election. But what came out of the Fed’s meeting on October 29 should have.
After six long years, Federal Reserve Chairwoman Janet Yellen announced that America’s central bank would be ending its controversial bond-buying program known as Quantitative Easing. The question now for economists, policy-makers, and political pundits alike is simple: did it work?
A Whole Lot of Bonds
Quantitative Easing may sound complicated, but it is really just printing money and buying assets. The Federal Reserve goes to asset holders and buys things like long-term Treasury securities and mortgage-backed securities. The goal of these purchases is two-fold. First, when you swap cash for bonds, there is a much more cash in the system, which lowers the interest rate and makes it easier for banks to lend money to investors. Second, the purchase of these assets drives down their yield, which reduces the borrowing costs for potential investors.
The scale of America’s experiment with QE has been unprecedented. When the program began in 2008, the Federal Reserve had less than $1 trillion in bonds on its books. Six years later, its holdings are up to $4.6 trillion.
Our Quantitative Easing program has presided over a remarkable economic recovery. In the six years since Ben Bernanke, former Chairman of the Federal Reserve, announced the first round of QE, growth has been steady, unemployment has fallen, and America’s deeply troubled housing market has rebounded. We are currently enjoying 49 months of uninterrupted positive job growth, 3% annual growth, and a mortgage interest rate that is two percent lower from before the asset purchases began.
The biggest fear of QE’s critics, rampant inflation, has also failed to materialize. When Quantitative Easing began in November, 2008, the annualized inflation rate was 1.1%. In the six years since, the rate has rarely risen above the Federal Reserve’s 2% target, prompting more fear that the growth might be stunted because of deflation than because of inflation.
The Real Legacy
Surely, the way that Quantitative Easing has impacted various economic indicators is important, but the legacy of QE will be much more shaped by the way that the Federal Reserve took it upon themselves to make economic policy when our political system broke down.
In the 2010 midterm elections, a wave of anti-Obama sentiment helped the Republicans retake control of the House of Representatives. A combination of political calculations and innate convictions led House GOPers to rule out any form of stimulus that they couldn’t sell as tax cuts. Even when the economy teetered on the brink of a double-dip recession and economists pleaded for stimulus, their intransigence never receded. This political reality severely limited the tools available to economic policymakers, and put the onus of stability squarely on the shoulders of the Federal Reserve.
Our experiment with Quantitative Easing can thus be tied to a much larger question: in times of severe economic crisis, can we trust our political system to work? President Obama was able to construct, pass, and sign his stimulus package less than a month into his Presidency, but that success was with an electoral mandate, a newcomer’s honeymoon period, and most importantly, a fully Democratic Congress.
Two years later, Mr. Obama’s economic team told him that the economy was in need of another jolt, so he called a joint-session of Congress to ask for passage of the American Jobs Act. To appease obstructionist Republicans, Mr. Obama’s legislation actually included more tax breaks than spending increases. It was a compromise. It was a chance for our political system to work.
Congressional Republicans just about laughed in his face. Senate Minority Leader Mitch McConnell said that the number of jobs losses after the first stimulus gave Americans, “1.7 million reasons to oppose another stimulus,” and Tea Party upstart Michele Bachman called the Jobs bill the, “son of stimulus.” After it became apparent that the bill (or any meaningful bill, for that matter) had no chance of passing through a red House, Ben Bernanke whipped up another round of QE.
In the period immediately following the end of Quantitative Easing, economists will comb through the data of the last six years to evaluate whether or not QE was a success. But the legacy of QE should always be viewed in the context of the post-2010 political climate. That more nuanced analysis gives critics of the policy another question to answer: if not QE, then what? When political gridlock precludes the vast majority of possible solutions, we can throw our hands up and blame the other side (which we do plenty of anyways), or we can look to other institutions to fill the void left by a broken system. What the Fed did may not have been perfect, but the only alternative was to watch unemployment lines explode in a futile attempt to let our economy sort itself out.
Time to Go
Even QE’s strongest proponents should be excited to say good riddance. Being able to abandon the crutch of artificially low interest rates means that the Fed believes that the American economy is finally equipped to stand on its own. That is not to say that our recovery from the crash in 2008 is complete, but it does mean that we have gotten to a place where backsliding into recession is no longer an imminent threat.
Finally, we all need to recognize that QE is a last-ditch, desperation, Hail Mary policy that should not be turned to every time we have a month of lackluster job creation. 2008 was a time of crisis, and the legacy of QE should be that it helped guide us through the crisis. Let’s just hope that it is a very long time before we once again require such guidance.