Lessons from the U.S. Experience with Quantitative Easing
Speaking in Frankfurt, Germany, Federal Reserve Bank of Boston President Eric Rosengren gave his perspective on the United States' largely successful experience with quantitative easing.
"It may be some time before a full assessment of the effects of our quantitative easing policies can be made, since a full evaluation will require a successful return to a normalized monetary policy," he said. "Nonetheless, I think it is quite possible and appropriate at this point to consider which design features of the Federal Reserve's asset-purchase program were effective, and which were less successful, in achieving our monetary policy goals."
Based on the U.S. experience with QE, Rosengren observed that (1) a significant undershooting of the inflation target should be treated with the same policy urgency as a significant overshooting of the inflation target; (2) that open-ended quantitative easing tied to policy goals is likely to be much more effective than limited quantitative-easing programs; and (3) that clarity on monetary policy communications is difficult to achieve, but critically important for the success of the program.
Rosengren emphasized that program design and communication are both important when it comes to quantitative easing. A program that is open-ended and focused on areas where spreads are large-in conjunction with a communication strategy tied to goals-seems to have made a material difference in outcomes for the U.S., he said.
He went on to say that the so-called "dual mandate" is one reason why the Federal Reserve moved more aggressively than many other central banks to address the significant undershooting of inflation in the U.S., and that many other countries have experienced.
"How aggressively a central bank reacts to this situation depends on whether that central bank's mandated goals involve inflation alone, or as in the U.S., a dual mandate that includes employment," said Rosengren. "I felt it was important that the focus on weak labor markets, as well as the undershooting of inflation, together provided important support for U.S. monetary policymakers to decide to move aggressively during the financial crisis, and indeed its long aftermath."
"However, I would argue that regardless of mandate, delays by central banks in moving to address the undershooting on inflation can be costly-especially if such delays lead households and firms to expect very low inflation rates."
In the absence of the dual mandate, significant and needed policy actions, like Operation Twist or QE3, may not have occurred, Rosengren said. Had these policy actions not occurred, he believes it would have "prevented what was ultimately important pre-emptive action against a persistent undershooting of the inflation target that could have become much worse, as in some other parts of the globe."