David Beckworth recently interviewed Jim Hamilton on a wide variety of topics, including energy and monetary policy. At one point they discussed Hamilton’s recent research on the impact of QE. Hamilton discussed the March 18, 2009 QE announcement, which is sometimes cited as evidence that QE was effective. On the day of the announcement, 10-year bond yields plunged from roughly 3.0% to 2.5%.
Hamilton pointed out that the market response doesn’t necessarily indicate that rates fell due to monetary expansion. An alternative interpretation is that the announcement led traders to re-evaluate their view of the economy, perceiving the Fed to have relevant non-public information. Hamilton suggested that investors may have thought:
What do they know that I didn’t? And, maybe the economy is in worse shape than I thought.
If that were the case, then you’d expect other markets to reflect this bearish perception. In fact, exactly the opposite occurred. Here is the NYT, from March 18, 2009:
The Federal Reserve sharply stepped up its efforts to bolster the economy on Wednesday, announcing that it would pump an extra $1 trillion into the financial system by purchasing Treasury bonds and mortgage securities. . . .
Investors responded with surprise and enthusiasm. The Dow Jones industrial average, which had been down about 50 points just before the announcement, jumped immediately and ended the day up almost 91 points at 7,486.58. Yields on long-term Treasury bonds dropped markedly, and analysts predicted that interest rates on fixed-rate mortgages would soon drop below 5 percent.
This suggests that markets treated the QE announcement as an expansionary monetary policy, which sharply lowered long term bond yields and also raised equity prices by roughly 2%.
On the other hand, I do agree with Hamilton’s claim that the big decline in interest rates (throughout the world) during the Great Recession was mostly due to other factors such as slow growth, not QE.
PS. Let me reiterate that QE is not a policy, it’s a tool. Thus QE is not the way to prevent demand shortfalls. To do that you need a sound monetary policy, preferably NGDPLT. Then QE can be used as a tool to implement that policy, in the unlikely event it is needed.