Thursday, December 9, 2010

Measuring QE2 Effectiveness

In announcing QE2 in their November 3 FOMC meeting, the statement contained the following excerpt:

"Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Currently, the unemployment rate is elevated, and measures of underlying inflation are somewhat low, relative to levels that the Committee judges to be consistent, over the longer run, with its dual mandate. Although the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, progress toward its objectives has been disappointingly slow.

To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to expand its holdings of securities. The Committee will maintain its existing policy of reinvesting principal payments from its securities holdings. In addition, the Committee intends to purchase a further $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month. The Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability."


There are many different ways one could use to gauge whether QE2 is successful.  Of great significance, I am not aware of any official statement that specifically states the goals (and metrics of such) of QE2.

However, lowering of interest rates, especially the 10-Year Treasury, appears to be a/the primary goal.

Below is a chart of the 10-Year Treasury yield, starting on November 3, the date of the announcement.  The actual asset purchases began on November 12:

(click on chart to enlarge image)(chart courtesy of

As one can see, the 10-Year Treasury Yield has risen substantially over this period.

As for the goal of (modestly) increasing inflation, there are no daily CPI values available for this period.  However, if one uses values from the Billion Prices Project (which I discussed in the November 24 post) as a proxy, the index values have actually decreased.  The index was 100.76 on November 3; 100.6679 on November 12; and 100.51 on December 7.

It will be very interesting to see whether QE2 seems to meet its objectives.  Of course, if QE2 fails to reach its objectives, perhaps the foremost question would appear to be why this is so.  I plan on further commenting upon QE2 and its apparent effectiveness in future posts.  (posts on Quantitative Easing can be found here)


A Special Note concerning our economic situation is found here
SPX at 1232.55 as this post is written

1 comment:

  1. Ted, Treasury yields also rose sharply after QE 1, but QE 1 was seen as a success. Hence QE 2. You may be wondering why QE can be seen as a success if the objective of QE is to lower interest rates yet interest rates rise after QE. The answer is that the objective of QE is to lower interest rates "ceteris paribus". That is, to lower interest rates relative to what they would have been, without QE. Therefore, if interest rates rise, QE can still be a success if it lowered interest rates below what they would otherwise have been. The question then is what the root cause of the recent rise in Treasury yields is. There are many factors that go into the Treasury price including liquidity preference (credit risk), inflation expectations, and supply and demand at various maturity levels (market segmentation).