The Federal Reserve's novel quantitative easing programs are soon finished, and while the economy is not booming, it's certainly strong than in November when the second round of QE was undertaken. What effect QE2 had is hard to figure -- interest rates rose pretty steadily from the start -- but conditions are much better in consumer spending and job creation. Let's hope higher oil prices and government budget cuts don't present too much of a headwind.
So far the program has purchased $404 billion of Treasury bonds, out of an authorized $600 billion, say economists at Northern Trust. (The first program purchased $1.7 trillion of Treasury and other bonds, and ended in March 2010.)
The goal of the program was to get more liquidity into the U.S. economy -- to keep the wheels of commerce turning, and keep interest rates low, and stimulate stock prices, and draw a line under the fears that we might slip into deflation. At the time the second program was announced, my sense was that the Fed felt it had to do whatever it could: months after the first QE effort, unemployment was still at 9.8 percent versus 8.9 percent for February, job creation was slow, and the U.S. stock market had sold off on the prospects of more Eurocrises. (Here's what I wrote about it at the time of inception in early November 2010.)
Fed officials seem much more confident, and have emitted signals of an abrupt end to QE2 when it expires in June, rather than tapering off. As long as they advertise that they are stopping cold turkey, the markets can take it in stride. From Bloomberg:
"I don't see a lot of gain to reverting to a tapering approach," Atlanta Fed President Dennis Lockhart told reporters yesterday. "I don't think that is necessary," Philadelphia Fed President Charles Plosser said last month.President Richard Fisher of the Dallas Fed said he may even vote to end the program early, when the Board meets next Tuesday.
Treasury markets are "so deep and liquid that there doesn't seem to be a need" to taper the purchases, said [Chicago Fed president Charles] Evans, 53, who votes on the Federal Open Market Committee this year. "I wouldn't be surprised that if we decide to end it, we just end it."Has QE2 been a success?
Stocks are a lot higher -- the S&P 500 is up almost 12 percent from before the second program was announced. Chairman Bernanke has said many times that higher stock prices make everyone feel more prosperous and embolden the consumer.
Interest rates have firmed, however, from the better growth posture in the economy. The 10-year Treasury rate was at 2.6 percent at the end of October, and today stands at about 3.5 percent, having touched 3.75 percent before the big news from Libya.
Thirty-year mortgage rates bottomed at 4.17 percent in mid November 2010, and have risen to above five percent, but had settled back to 4.87 percent at the most recent weekly posting by Freddie Mac. Make no mistake -- mortgage rates are low. But even though the demand for mortgage finance has been low, its price has been rising.
Click to enlarge
(The All-American 30-year fixed-rate mortgage may soon be coming to an end as well, if the U.S. government decides to get out of the mortgage guarantee business, but that's another story altogether.)
Job creation seems to be on a steeper trajectory, and consumer spending is better -- the ICSC-Goldman Sachs Weekly Chain Store Sales Index showed an increase of 2.3 percent for the week of March 5, its best since January.
But the U.S. is not yet out of the woods, and QE2 will end just in time for $4-a-gallon gas, and the cuts in spending that are certain in federal, state and local government spending. Government employees make up 17 percent of the labor force -- what would widespread layoffs mean for the unemployment rate? Is there a QE3 in our future?