Unconventional Fed Policy Gets Mixed Assessment
Forward guidance and quantitative easing became important tools for the Federal Reserve in the Great Recession, but received mixed reviews as to their effectiveness.
With interest rates remaining lower than traditional levels, such unconventional monetary policy may be needed again in the future.
“These tools likely strengthened the economic recovery and helped return inflation to the Fed’s target — although their full impact remains uncertain,” writes Glenn D. Rudebusch, senior policy advisor and executive vice president in the Economic Research Department of the Federal Reserve Bank of San Francisco, in an Economic Letter.
While forward guidance is considered effective, there are costs, “and while it can be an important policy tool, the extent of its future use by the Fed is open to debate.”
Quantitative easing, or QE, involved Fed purchases of longer-term bonds. “Much evidence regarding the effects of QE comes from event studies that examine how asset prices shift in the hours after a Fed QE announcement,” Rudebusch notes.
But, he writes, evaluating the immediate reaction of the markets is “not a good measure of the effects of QE if they are reversed in a few days or weeks, and the possibility of such reversals is one reason why the economic impact of QE is still debated.”