The Impact of QE on Economic Growth

A brief study by economists at the Federal Reserve Board of San Francisco looks at the stimulatory effects of QE (or large scale asset purchases) on the U.S. economy.  Here are some of the salient points.

The authors, economists Vasco Curdia and Andrea Ferrero, look at the impact of QE2, the second stage of the Fed's grand experiment, announced in November 2010.  In this stage, the Fed was set to purchase $600 billion of long-term Treasuries in an attempt to push long-term interest rates down, push up inflation to avoid deflationary pressures and boost economic growth.  The authors note that the forward guidance offered by the Fed was key to the program's success.

Here's how successful QE 2 was:

Real GDP growth increased by 0.13 percentage point in late 2010

Inflation increased by 0.03 percentage point

Without forward guidance, QE2 would only have added 0.04 percentage point to GDP growth and 0.02 percentage point to inflation.

Here is a graph showing the change in real GDP growth related to QE and how the impact of large scale asset purchases declines over time to zero:

Here is a graph showing the change in inflation related to QE and how the impact of the asset purchases declines over time:

Please note that the grey bands around the red lines on both graphs show the 50, 70 and 90 percent probability and that the red line shows the median.  In the case of GDP growth, you can see that within four quarters, the impact of QE is essentially zero.

The authors note that a standard 0.25 percentage point cut in the federal funds rate would have a far greater impact on the economy as shown here:

Rather than increasing GDP by 0.13 percentage points in the case of QE, a 0.25 percentage point cut in interest rates would increase GDP by 0.26 percent, twice the impact with far less uncertainty as to the outcome.  Unfortunately, the Fed has backed itself into an interest rate corner from which there is only a painful means of escape.

The authors conclude by noting that asset purchase programs like QE2 have "at best, moderate effects on economic growth and inflation".  They go on to note that if the Fed hopes to be successful with its tapering program, it needs to ensure that it continues its policy of forward guidance.

After reading through this research, one has to wonder if the $3 trillion plus, unprecedented monetary experiment was worth it given the risks involved?