-- abstract from [2014.11.01] Early retirement
-- If QE works
and its potential costs are overstated
should the Fed not keep at it
-- A premature exit from QE3
is a good way to make sure there is a QE4
ON OCTOBER 29th
the Federal Reserve said it would end “QE3
Quantitative easing,
or the buying of assets with newly created money,
has been the workhorse of monetary policy
since rich-world interest rates fell almost to zero in 2008-09
There are three pressing questions for QE:
did it work,
did it have unacceptable side effects,
was the Fed right to stop
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QE is thought to work in a few ways
bank sold bonds to the Fed
will wish to spend the proceeds to buy some other asset.
When banks buy new securities,
the newly created money flows through the system,
raising asset prices
and reducing interest rates.
That should boost demand by making investment more attractive.
If banks buy foreign assets
that may weaken the exchange rate
giving a boost to exporters.
QE is also thought to work as a signal
it reinforces central banks’ policy guidance,
making promises to keep rates low more credible
QE has indeed lowered borrowing costs
and thus increased both economic output and inflation
Given how close so many economies now are to outright deflation,
even a small boost to inflation is not to be sneered at.
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Why haven't central banks done more in that case
the Fed has repeatedly overestimated
how quickly the American economy was likely to grow
The fear of possible side effects
has also stayed central bankers' hands.
In some cases, those are subsiding:
the new trillions coursing through the economy
would lead to hyper-inflation
no longer seem credible
given how static prices remain
Central bankers are also increasingly confident that
their pneumatic balance-sheets
will not interfere with conventional monetary policy
The Fed has begun paying interest on the excess reserves
banks keep with it.
By raising that rate
it can attract extra reserves and thus curb bank lending.
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The worry that QE is generating dangerous financial instability
has been more persistent.
persistently low interest rates
have caused investors to embrace frighteningly risky assets
its eventual collapse
may hurt more than QE ever helped.
There are good reasons
to believe they are overstated
Most central bankers insist
they have the regulatory tools
to keep excessive risk-taking in check
Reach for yield QE has prompted
has been modest relative to its benefits
Asset purchases helped recapitalise ailing banks
higher asset values
have dampened the incentive to make risky bets
QE might lead to undue risk-taking,
but if the policy also reduced the odds of
a catastrophic break-up of Euro
it would be worthwhile.
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Critics' third complaint is QE raises inequality
Asset purchases raise asset prices
and the rich own most financial assets
Yet to the extent that QE boosts growth
it reduces inequality
for joblessness is regressive
poorer workers suffer higher unemployment rates
and more significant loss of income
in weak economies
Higher inflation also makes debts easier to bear
because they can be repaid with money that is worth less.
Since borrowers tend to be poorer than creditors
QE diminishes inequality in that way too.
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If QE works
and its potential costs are overstated
should the Fed not keep at it
indeed
growth has been strong and steady
unemployment, at 5.9%, is near its long-term average
Yet leaving QE behind is never simple.
As long as interest rates remain near zero
any nasty new development will force the Fed to resume it
low and falling expectations of inflation suggest that markets doubt the
Fed's ability
to leave Japan-style stagnation behind
A premature exit from QE3
is a good way to make sure there is a QE4