US Federal Reserve to end quantitative easing programme.

Guardian: “The US Federal Reserve has called time on its $4.5tn bond-buying programme, halting a radical monetary policy introduced nearly six years ago to steer the world’s largest economy through the financial crisis.
“The central bank, led by Janet Yellen, said the final tranche of bonds under its quantitative easing programme would be bought this month, but it committed to keeping record low interest rates for “a considerable time”.
Announcing the decision on QE, made at its October policy meeting, the Fed said: “The committee judges that there has been a substantial improvement in the outlook for the labour market since the inception of its current asset purchase programme. Moreover, the committee continues to see sufficient underlying strength in the broader economy to support ongoing progress toward maximum employment in a context of price stability. Accordingly, the committee decided to conclude its asset purchase programme this month.”
It brings to an end a programme which marked a departure for US monetary policy when it was launched in December 2008, hugely swelling the Fed’s balance sheet in an effort to prop up a battered financial system. The Fed began to slow its purchase of Treasury bonds and mortgage-backed securities in January, but until now it had not confirmed an end date. The central bank has steadily reduced its monthly bond purchases from a peak of $85bn a month to $15bn a month.
Despite the end of its bond-buying programme, US monetary policy remains ultra loose, with an interest rate range at a record low of between zero and 0.25% since December 2008.”
Larry Elliot: “Quantitative easing: giving cash to the public would have been more effective. It’s 2008. Your name is Ben Bernanke, the world’s most powerful central banker. The world’s financial system is going through its own version of the China Syndrome. Do you: a) do nothing and trust the self-correcting properties of capitalism; b) cut interest rates as far and as fast as you can in the hope that cheap money will avert catastrophe; or c) go for broke by trying something different?
Bernanke, an expert on the 1930s, chose c). He embraced the idea of quantitative easing, which involves increasing the money supply in order to stimulate economic activity. The Bank of England quickly followed suit. Neither Bernanke nor Mervyn King wanted to be known as the central banker who failed to prevent a deep recession becoming a second Great Depression.
The decision by Bernanke’s successor, Janet Yellen, to call time on QE is an appropriate juncture to ask some fundamental questions. Has QE worked? Does it mean the end of economic stimulus? Who really gained from the policy? Were there any better alternatives?
The answer to the first question is that QE has worked, up to a point. Sure, this has been a tepid recovery in the US and a non-existent recovery in Europe, but the outcome would almost certainly have been a lot worse had central banks not augmented ultra-low interest rates with their money creation programmes. The comparison between the US and Europe is telling: monetary policy has been far more proactive and expansionary in the US than it has been in the eurozone, which helps to explain the disparity in growth and unemployment rates.
It is also the case, though, that the impact of QE has been blunted in the US and the UK by the combination of unconventional monetary policies with conservative fiscal policies. There has been a tug of war between stimulus and budgetary austerity.
The unspectacular recovery means that stimulus policies will continue. Even though the UK and the US are posting annual growth rates of around 3%, there is no hurry to start raising interest rates. Many financial analysts suspect that central banks will never reverse QE by selling the bonds they have bought.
QE has also had unforeseen side-effects. The policy involved allowing banks and other financial institutions to exchange bonds for cash, and the hope was that this would lead to improved flows of credit to firms looking to expand. In reality, it encouraged financial speculation in property, shares and commodities. The bankers and the hedge fund owners did well out of QE, but the side-effect of footloose money searching the globe for high yields was higher food and fuel prices. High inflation and minimal wage growth led to falling real incomes and a slower recovery.
QE could have been better designed. There could have been a better dove-tailing of monetary (interest rates and QE) and fiscal (tax and spending) policies. There was a strong case for the targeting of QE at specific sectors of the economy, such as green infrastructure. In retrospect, far too much faith was put in the banks to channel QE to where it was needed. Handing a cheque directly to members of the public would have got money into the economy much more effectively.
Central banks have always been wary of “helicopter money” on the grounds that QE is temporary while giving cash to the public is permanent. But the temporary has become permanent. What was once unconventional has now become conventional. So much so that even the European Central Bank is toying with the idea. Perish the thought, but imagine there is a second global financial crisis as bad as the first. Would policy makers look at alternatives to plain vanilla QE? Almost certainly, yes.”