Saturday, August 3, 2013

QE3: the act of doing the same thing and expecting different results

As we approach the first anniversary of the Fed's monetary expansion effort (QE3), it's worth comparing the success of the current program with that of 2010-11 (QE2). At this stage the two are roughly equivalent in growing bank reserves.

Note: The official start dates were a bit different but the announcements took place around the same time

In fact just in the past few weeks the QE3-induced reserve growth exceeded that of QE2, as the total bank reserves (commercial banks' deposits with the Federal Reserve banks) move above $2 trillion (and the US monetary base moves above $3.2 trillion).

The key to these programs' effectiveness is their impact on credit growth. Here is the comparison. One could presumably argue that QE2 resulted in stemming the credit contraction taking place in 2010. It's hard to make that argument for QE3.

Given this result, why would any central bank want to continue on its current path? Some would argue it is to keep longer term interest rates low. But the 30-year mortgage rate is now some 60+ basis points higher than it was when QE3 was announced. So if it's not credit growth or interest rates, what is the mechanism to transmit this "unconventional" monetary policy into the economy and job growth?

You hear economists talk about how the Fed should continue buying securities at the current pace because the US economic growth remains tepid. But isn't this simply doing the same thing (now for a year) and expecting different results?
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