Misconceptions About Fed's Bond Buying

by Joseph E. Gagnon, Peterson Institute for International Economics

Op-ed in Bloomberg
September 2, 2013

© Bloomberg


To combat the recession that began in 2007, the Federal Reserve and some other central banks have been buying large amounts of long-term bonds. The novelty of this quantitative easing (QE) makes the policy especially prone to popular misconceptions.

Misconception No. 1: QE bond purchases are comparable to stimulus spending on roads and tax cuts, which adds to the national debt.

Misconception No. 2: Any effect of QE on long-term interest rates, and hence on economic activity, is small and temporary. That's why bond yields are higher now than a year ago and the economic recovery remains sluggish.

Misconception No. 3: The main lasting impact of QE is to raise stock prices, which disproportionately benefits the wealthy.

Misconception No. 4: QE is disrupting financial markets and encouraging risky and wasteful behavior.

Misconception No. 5: QE and the ultralow interest rates that go with it remove the incentive for banks to lend and thus may harm the recovery.

Misconception No. 6: QE is going to cause high inflation.

In the difficult conditions that prevailed after the crash, QE was the right policy, and it still is.

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