Quantitative easing, or QE, has been one of the most controversial policies of the US government since the financial crisis began in 2008. By artificially pumping money into the bonds market the Fed was able to stimulate demand in the US economy and help the stock markets recover from the worst effects of the crash, but the program has grown far beyond what was planned six years ago. There have now been three rounds of QE in total and between them they’ve sucked up $3.5 trillion, a lot more than anyone at the Fed expected when they started the process. The aim was to increase the money supply beyond what the devastated banks could manage, through buying up financial instruments – including colossal amounts of mortgage debt. The effect was to put more money in the hands of banks, businesses and consumers, and overall it’s sent several trillion dollars flowing through the economy.
QE has its opponents however, including many economists who object to using tax money to buy up potentially toxic assets. It also runs a risk of inflation, so even with an increased money supply that money can’t buy as much. In any case it might all be academic now, because the Fed has announced that the current round, QE3, should be the last. They’re reserving the option to launch a fourth round if the economy falters again, but without at least a minor crisis the central bank should be back to normal rules soon.
The Fed has explained that QE is ending because the economy is now robust enough to maintain and improve on current employment levels without external support. The decision hasn’t come as a surprise; there have been hints for weeks that the policy could end soon, and ongoing buoyant employment figures have fueled speculation among analysts. Now it’s official, and although the bank has tried to close it off twice already this time looks much more promising. The credit markets are recovering, equities are heading up – although not as robustly as they could be – and the Fed plans to keep rolling over the bonds and other long-term securities it currently holds. All being well, the economy should be able to keep growing on its own.
Not everyone is as optimistic, however. Many analysts in overseas markets are worried that the move is premature; European and Asian economies are facing another possible slowdown and they doubt the USA can grow on its own. If they’re right then reducing cash flow like this could push the country back into recession. On the other hand if they’re wrong then continuing QE would almost certainly cause increased inflation. Even some US commentators think the Fed’s assessment is too optimistic and the policy is being ended too soon.
Apart from direct bailouts, few economic policies since the debt crisis have been as controversial as QE. Analysts are still arguing over how effective it’s actually been, and there’s still the prospect of it returning if necessary. However for now it looks like the Fed is going to stop artificially pumping up cash flows. Now we’ll find out how robust the recovery really is.