The US Federal Reserve (Fed) marks the official end of its second program of quantitative easing (QE2) on 30 June 2011. By then the Fed will have bought USD 600 billion in Treasuries, increasing the US monetary base by the same amount to roughly USD 2.6 trillion. In fact, the Federal Reserve will have more than tripled the monetary base since mid-2008, before the financial crisis started. This sort of monetary policy in peacetime is unprecedented.
Some investors, even some savvy ones, fear that the end of QE2 will have massive negative repercussions on the US economy and hence on the markets by pushing up interest rates. Others, including ourselves, have particular apprehensions when looking at long-run inflation prospects of such an extreme policy. Nevertheless, a detached view of the whole QE2 reveals that so far it has not had the expected positive effects. Hence as a mirror image, it shouldn’t have the now anticipated negative effects. Or should it?
When Ben Bernanke, Chairman of the Federal Reserve, announced its QE2 program in November 2010, he listed a catalogue of things which were supposed to happen: “Easier financial conditions will promote growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence.”
Comparing November 2010 with the latest available statistics we note that housing starts in the US are still significantly below 600,000 units (to be compared with over 2 million at the peak of the housing bubble), moreover house prices measured by the Case-Shiller index are now lower than in April 2009. Unemployment has retreated somewhat, but its rate remains above 9%. Finally, US growth in the first quarter 2011 only posted a dismal 1.8% annualized (to be compared with the 6% of Germany or the 4% of France).
Interestingly enough, the 10-year Treasury yield stands today near 3.0%, roughly 0.2% above its November 2010 level, but 0.7% below the peak reached in February. Trade-weighted, the US dollar has weakened some 6% since last November, but this hasn’t boosted exports. The trade balance has worsened since, due to an increased oil bill.
The only really significant effect which could be attributed to QE2 among others has been a rise in the US stock market of roughly 8% since November until now, though we have retreated almost 7% from the April peak. This has still barely moved US consumer confidence, which remains at levels near last November.
This year’s first quarter turmoil in the Arab world and the catastrophe in Japan spawned a volatile and risk-adverse environment. However, overall and compared with Bernanke’s expectations, QE2 has been a huge disappointment. It will likely be cited in academic courses in the future as a case study to prove the neutrality of money and the ineffectiveness of monetary policy.In his last statement on 7 June even Ben Bernanke had to admit that the economic recovery is “frustratingly slow” and that not much can currently be done about it, contradicting somewhat the activism showed previously. This said, like the market consensus, he still expects the US economy to rebound in the second half of 2011. Knowing the forecasting track record of the Federal Reserve, one shouldn’t take this for granted.
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