When Monetary Policy Pushes Hard

With the recent announcement of QE2 (quantitative easing 2), the Federal Reserve’s new round of long-maturity asset purchases, it is worth looking at some of the effects of QE1. In November 2008, the Fed announced large-scale purchases of mortgage-backed securities and debt issued by the GSEs. Its securities holdings began to climb sharply in early 2009. As shown in blue, the monetary base (a broad measure of the Fed’s liabilities) had already begun to rise several months earlier. New asset purchases for QE1 ended earlier this year.

The effects of QE1 and the other stimulative policies adopted by the Fed since late 2008 will be debated for some time to come. But notably, the green line shows that a trade-weighted index of the dollar’s value against a basket of foreign currencies has declined quite a bit. Some world leaders are unhappy about this development, but it may have helped to spur real (inflation-adjusted) U.S. exports, shown in red.

The orange line shows the yield on a 10-year inflation-indexed Treasury security, which can be used as a measure of the real interest rate. This rate has tumbled from well over 3.5 percent to negative levels. Some economists doubt that a monetary authority such as the Fed can succeed in reducing real long-term interest rates over a prolonged period, but this is a remarkably sustained trend.

Notes: The interest rate series in the graph has been rescaled (actually, multiplied by 100), so that its movements can be seen more easily. The export series has been deflated to 2005 dollars, using a chain-weighted GDP price index. The exchange-rate series, which is the Fed’s index of the value of the dollar against the “major currencies,” is scaled so that the first observation equals 1000. The monetary base is expressed in billions of dollars. Except for the exchange rate and interest rate series, all data shown in the figure have been seasonally adjusted. Detailed information on the Fed’s asset purchases and its balance sheet can be found in this series of official reports.