PHILADELPHIA — When the Federal Reserve ends its $600 billion binge on Treasury securities next week, the nation's central bank will have accomplished a great deal. Some good and some not so good.
"Like everything else, it is a mixed bag," said Robert Dye, senior economist at PNC Financial Services Group in Pittsburgh. "It had an immediate positive impact on equity markets," Dye said, "but it also likely contributed to higher commodity prices," notably gasoline, whose spike has sapped wallets this year.
Economists also said the Fed's Treasury-buying program helped corporations save money through record-low bond rates, as well as extremely enticing home mortgage rates for the relatively few Americans confident enough to buy.
But despite its success in the financial realm, the Fed program — known as quantitative easing — has not met expectations in reviving the real economy, where people get hired, collect paychecks, and spend money in ways that get more people hired.
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The Federal Reserve started buying longer-term Treasury securities and other government-related bonds in November 2008, when the financial system was in a tailspin, as a way to push to down longer-term interest rates after it already had brought short-term rates close to zero.
The Fed typically buys and sells short-term Treasuries to push short-term rates up or down. When the Fed is selling, rates rise. Rates go down when it buys — as it has been doing much of the time since late 2008.
The goals of quantitative easing, often shortened to QE, were to support the cratering housing market by boosting mortgage and corporate lending, both of which had endured crises in 2007 an d 2008.
The initial $1.75 billion effort ended in March 2010, but when the economy continued to sputter last summer and some feared that the economy was on the verge of deflationary shrinkage, Ben Bernanke, the Fed's chairman, laid out the framework for a new round of buying, dubbed QE2, in August.
Stocks rallied and the job market started to show some life. In February, March, and April of this year, the economy added more than 650,000 jobs, more than in any three-month period since 2006, excluding last year's temporary bump from Census hiring in the spring.
Even though the economy is back in another slow patch, two years after the official end of the worst recession since the 1930s, Bernanke said this week that the Fed had no plans for QE3, or a third round of extraordinary economic stimulus.
That makes sense, said Mark Zandi, chief economist at Moody's Analytics in West Chester, Pa. "I think you really only want to do QE if you're afraid of deflation. That was a reasonable fear a year ago, but deflation is not on the table now. From that perspective, another round of QE would not be appropriate."
Moreover, Zandi said he thought the economy did not need another shot of stimulus from the Fed. "I've been surprised and disappointed by the weak performance, but I think it's due to forces that are already unwinding," he said, citing the run-up in energy prices, the natural disasters in Japan, and bad weather in the United States.
One of the knocks against the Fed's Treasury-buying spree is its failure to boost bank lending. "We haven't been able to see a direct link between quantitative easing and bank lending," which has only slightly improved, Dye said.
It is impossible to say how much worse the slump would have been without Bernanke's willingness to take the risk of swelling the Fed's balance sheet of securities to $2.8 trillion.
But Mark Luschini, chief investment strategist at Janney Montgomery Scott, raised the possibility that conditions may have needed to get even worse than they did "to enable a more healthy environment to rise from the ashes."