|By John Waggoner, USA TODAY|
Quantitative easing has died for the third time, but easy money lives.
"We're writing the eulogy on the most extreme Federal Reserve intervention in history," says
The Federal Reserve's job of keeping the economy humming was extraordinarily difficult during the 2007-09 financial crisis. The housing market collapsed; banks and investors stopped lending; the stock market endured its worst fall since the Great Depression; unemployment soared.
The Fed's diagnosis: Deflation, not inflation, was putting the economy in grave danger. The central bank pushed the key short-term fed funds rate to zero, which would let businesses and consumers borrow at cheaper rates.
But that still wasn't enough to get the economy out of the intensive-care unit. So the Fed began buying long-term securities — Treasury bonds and mortgage-backed securities — to push long-term rates lower. The Fed essentially created the money to buy the bonds, expanding the U.S. money supply. And by taking those bonds off the market, the Fed pushed long-term rates lower — especially mortgage rates.
After three rounds of bond buying, the Fed has ended the program, at least for now. "It's an inflection point," LeBas says. "The Fed is still providing support, just less of it."
Inflation — another widely predicted byproduct of the Fed's program — has failed to materialize, too. The consumer price index, the government's main gauge of inflation, has risen just 1.7% the past 12 months and has averaged 1.6% since the first round of quantitative easing started in
What will the post-QE era look like?
•Low short-term rates. A neutral position for the fed funds rate is about 4%, says
•Low long-term rates. Deflation in
•Higher dollar. Even though the Fed's easy money policies are still in place,
For investors, this means that stocks will still look better than bonds or money market funds for some time, assuming corporate earnings continue to be robust. But don't hold your breath for a blast of money to come from the bond market to the stock market. "About 40% of the bond market is owned by investors who can't sell," LeBas says. Banks and insurance companies, for example, have to buy bonds to fund parts of their business.
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