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Did So-Called Quantitative Easing (QE) Boost Economy?

CNBC's finance writer, Jeff Cox, reported earlier today that according to an official of the St. Louis Federal Reserve Bank, there is "no evidence QE boosted economy."

Here's how Cox begins:

"The Federal Reserve is putting some of its post-crisis actions under a magnifying glass and not liking everything it sees.

"In a white paper dissecting the U.S. central bank's actions to stem the financial crisis in 2008 and 2009, Stephen D. Williamson, vice president of the St. Louis Fed, finds fault with three key policy tenets.

"Specifically, he believes the zero interest rates in place since 2008 that were designed to spark good inflation actually have resulted in just the opposite. And he believes the "forward guidance" the Fed has used to communicate its intentions has instead been a muddle of broken vows that has served only to confuse investors. Finally, he asserts that quantitative easing, or the monthly debt purchases that swelled the central bank's balance sheet past the $4.5 trillion mark, have at best a tenuous link to actual economic improvements.

"Williamson is quick to acknowledge that then-Chairman Ben Bernanke's Fed, through liquidity programs like the Term Auction Facility that injected cash into banks, "helped to assure that the Fed's Great Depression errors were not repeated.

"But as for spurring inflation, reducing employment or otherwise generating sustained economic activity, the results, particularly for QE, are "at best best mixed." In addition to muted inflation, gross domestic product has yet to eclipse 2.5 percent for any calendar year during the recovery, while wage gains, and consequently living standards, have been mired around 2 percent or less."

Here's the link to the 16-page white paper referenced in the second paragraph of Jeff Cox's CNBC article. The Economist magazine has this March 9, 2015 article explaining quantitative easing.

The key takeaway from Jeff Cox's article is:

"There is no work, to my knowledge, that establishes a link from QE to the ultimate goals of the Fed—inflation and real economic activity. Indeed, casual evidence suggests that QE has been ineffective in increasing inflation," Williamson wrote.

"For example, in spite of massive central bank asset purchases in the U.S., the Fed is currently falling short of its 2 percent inflation target," he added. "Further, Switzerland and Japan, which have balance sheets that are much larger than that of the U.S., relative to GDP, have been experiencing very low inflation or deflation."

"The primary place where QE seems to have worked is in the stock market, where the S&P 500 has soared by 215 percent since the recession lows in March 2009. Elsewhere, though, deflation fears have permeated and interest rates have remained low."

While Cox's article should be read in its entirety, it's worth noting the provisos on the white paper:

"The views expressed are those of the individual authors and do not necessarily reflect official positions of the Federal Reserve Bank of St. Louis, the Federal Reserve System, or the Board of Governors.

"Federal Reserve Bank of St. Louis Working Papers are preliminary materials circulated to stimulate discussion and critical comment. References in publications to Federal Reserve Bank of St. Louis Working Papers (other than an acknowledgment that the writer has had access to unpublished material) should be cleared with the author or authors."

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