By Shlomo Maital
OK, the Fed, under Janet Yellin, has officially ended QE3. After injecting 4 trillions dollars of cash into the US economy, $85 b. a month for almost four years, it’s over. It’s time for a summary. QE (quantitative easing, RIP, rest in peace).
How well did it work? Well, it was better than Europe’s austerity, and the EU learned nothing from Ben Bernanke’s aggressive actions to forestall a new Depression. The U.S. unemployment rate is 5.9%, GDP growth was 4.6% last quarter, and the dollar strengthened. Is Europe paying attention?
For investors? The 3 QE plans created great uncertainty and volatility. Each time a QE (quantitative easing, meaning, the Fed buys bonds and injects money into the system, that banks can lend) was announced, the stock market rose (expecting some of the new money would go into equities) and each time it ended, the stock market fell.
Against expectations the QE 3 has actually lowered the 10 year Treasury bond rate, after it rose by 100 basis points. This cost bond legend Bill Gross his job at PIMCO, the world’s biggest fixed income investment fund; he guessed wrong on the direction.
Despite that mountain of money, inflation remains low, because most of that money is just sitting there, not moving; money velocity has declined. Deflation is the problem, in the U.S. but mostly in Europe.
Overall, faced with the lack of fiscal policy (as politics forced Obama to slash the US federal budget deficit), there was no other policy tool available to stimulate the economy, other than QE, boosting the supply of money. It may yet prove harmful, because the dollar is the world’s currency, still, and there are far too many dollars washing around out there – they are causing property bubbles far away, even in Hong Kong and China. But for now, it looks like the three QE programs led by Ben Bernanke worked not bad.
Let’s watch now how his successor Janet Yellin handles weaning Wall ST. from its junky addiction to cheap money.