The Federal Reserve has declared the financial crisis over.
On Wednesday, the Federal Reserve moved to end its most controversial post-crisis policy move: buying assets to stabilize and support credit markets.
This program of quantitative easing (QE) began in November 2008 and saw the Fed’s balance sheet balloon to over $4 trillion as it purchased Treasury bonds and mortgage-backed securities in purchases that ran intermittently through October 2014.
And starting in October, the Fed will begin to undo this program by unloading up to $10 billion — $6 billion in Treasuries and $4 billion in mortgage-backed securities — each month. This amount will increase until $50 billion are coming off the Fed’s books each month.
And while it’s clear that the Fed’s bold moves to be more active in financial markets helped underwrite confidence — and high asset prices — in the economy, this ending was often seen as setting the economy up for failure. Or worse.
Famously, a number of economists, professors, and money-managers published an op-ed in The Wall Street Journal in 2010 warning then-Fed Chair Ben Bernanke that, “The planned asset purchases risk currency debasement and inflation, and we do not think they will achieve the Fed’s objective of promoting employment.”
At the time, the unemployment rate was north of 9%; as of August, the unemployment rate was at 4.4%. The U.S. dollar has not been debased, and while some strategists think its era of being the world’s reserve currency may be nearing its end, the dollar still enjoys primacy in global financial markets. Inflation is still running below the Fed’s 2% target.
Of course, the worries about the Fed’s policies, both then and now, are also rooted in ensuring caution regarding what we cannot and do not know about how bold moves by the central bank into financial markets will impact the economy over the longer term. In this risk-reward framework, then, the risks of the Fed creating distortions that lead to later financial ruin outweigh the rewards.
Some would likely argue that the Fed’s QE program exacerbated, or at least helped continue, trends that are leading to widening economic inequality. Only just over half of American adults have any exposure to the stock market, only 64% of Americans own a home, and both financial assets and real estate prices have been quite strong since the crisis.
Wage growth, meanwhile, remains frustratingly low, with average hourly earnings rising just 2.6% over last year in August. Wage gains, however, have been accruing faster to those are the lower end of the earnings scale.
Those critical of the Fed will also note that this unwinding of QE is only just beginning. There is still time yet for something to go wrong as the Fed steps back from markets, in this view.
And yet with its move on Wednesday, the Fed spoke clearly — the financial crisis is over.
Fed Chair Janet Yellen also laid plain on Wednesday that unless some extremely adverse scenario were to arise in the U.S. economy — and one imagines a recession that does not coincide with a financial crisis does not qualify — this plan will not be paused. The balance sheet, in Yellen’s words, is not a primary policy tool for the Fed.