Did quantitative easing help stimulate the U.S. economy?
The U.S. economy experienced it's greatest recession since the Great Depression between 2007-2010. House prices dropped by 31% across the nation and various large financial firms experienced financial hardship. Since the Federal Funds rate hit the ‘zero lower bound,’ the Fed had to stimulate the economy through the unconventional monetary method of quantitative easing (QE).
Between December 2008 and summer of 2012, the federal
reserve implemented three rounds of quantitative easing. The first round of QE
in 2008 involved purchases of nearly $2.1
trillion treasury bonds and mortgaged-backed securities in an effort to expand
credit availability and improve the housing market as a whole. In 2011 business
output and employment remained below Fed targets so QE2 was announced where
they bought $600bn
mortgage-backed securities. In 2012 unemployment
remained high and business investment was slow. The Fed funds rate was still
close to zero, so QE3 was announced and monthly purchases of $85bn
in open-ended bonds began.
The Fed’s use of QE after the 2008 financial crisis was
considered a ‘relative
success’. It injected liquidity into the financial system and stopped the
banking sector from completely collapsing. The purchasing of non-performing
assets (retail banks bad debt) kept
inflation under control and allowed retails
banks to issue new loans as early as 2010, whereas the purchasing of assets
increased
the currency in circulation. QE1 was considered most effective
by economists as borrowing and investment increased, leading to a 170%
increase in conforming mortgage origination. Mortgage rates decreased
by roughly 35 basis points following QE2 and lending
rates decreased by roughly 18 basis points in QE3.
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