Measuring QEís Impact

By Ted Kavadas
August 15, 2013

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I have written extensively about Quantitative Easing (QE) and Interventions as I believe many aspects of these practices lack recognition and understanding. My analyses indicate that QE (also referred to as "Large-Scale Asset Purchases" (LSAPs)) in general carries an array of risks, detrimental impacts, and unintended consequences. It has complex impacts on the economy and markets.

Over time, there have been several studies and estimates made with regard to measuring the impact of QE programs, and those that I have seen indicate a wide range of conclusions. While I donít necessarily agree with the methods used or conclusions reached in these various efforts, I do feel that the overall topic of assessing the impact of QE is of great importance, given its prevalence in U.S. monetary policy.

Measuring QE can take many different forms, as not only are there different QE programs (e.g. QE1, QE2, etc.) but also a variety of areas that can be assessed, including QEís impact on the economy, on the bond market, and on the stock market; as well as on numerous other assorted areas, including market expectations and the potential for (mark-to-market) losses in the Federal Reserveís portfolio, which I most recently discussed in the post of June 26 titled "Potential Losses In The Federal Reserveís Portfolio."

One recent study that I found notable, although donít necessarily agree with, is the Federal Reserve Bank of San Franciscoís Economic Letter of August 12 titled "How Stimulatory Are Large-Scale Asset Purchases?" This paper discusses the impact of QE2, derived through simulation, and compares these findings to other research. While I believe that this document should be read in its entirety, here are a couple of excerpts:

Our model estimates that such a program lowers the risk premium by a median of 0.12 percentage point. Figure 1 shows the programís effects on real GDP growth and inflation. The red line is the median effect in annualized percentage points. The shaded areas represent probability bands from 50% to 90% around the median. The estimates reflect uncertainty arising from three factors: the sensitivity of the risk premium to the asset purchases, the degree of investor segmentation, and other model parameters influencing the economyís response to interest rate changes.

The 0.13 percentage point median impact on real GDP growth fades after two years. The median effect on inflation is a mere 0.03 percentage point. To put these numbers in perspective, QE2 was announced in the fourth quarter of 2010. Real GDP growth in that quarter was 1.1% and personal consumption expenditure price index (PCEPI) inflation excluding food and energy was 0.8%. Our estimates suggest that, without LSAPs, real GDP growth would have been about 0.97% and core PCEPI inflation about 0.77%.

And, from the conclusion:

Asset purchase programs like QE2 appear to have, at best, moderate effects on economic growth and inflation. Research suggests that the key reason these effects are limited is that bond market segmentation is small. Moreover, the magnitude of LSAP effects depends greatly on expectations for interest rate policy, but those effects are weaker and more uncertain than conventional interest rate policy. This suggests that communication about the beginning of federal funds rate increases will have stronger effects than guidance about the end of asset purchases.


This Special Note summarizes my overall thoughts about our economic situation.

SPX at 1685.39 as this post is written



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