June 30, 2011

WITH A FEW last multibillion-dollar mouse clicks,the Federal Reserve’s bond traders have finished the $600 billion program of Treasury-bond purchases known as “QE2.” This second round of “quantitative easing” — the economist’s term for money creation by direct central bank balance-sheet expansion — began last fall and followed a previous $1 trillion round at the height of the Great Recession in 2009. Federal Reserve Chairman Ben S. Bernanke announced QE2 in late August 2010 to prevent a spate of unexpected economic weakness from spiraling into a double-dip recession or outright deflation. QE2 has been controversial from the moment Mr. Bernanke announced it. But was it a success?

Let’s start with the positive side of the ledger. A year ago, inflation was running below the Federal Reserve’s rough target of 2 percent per year, a sign, to Mr. Bernanke, of deflation risk. That’s not a problem anymore. Deutsche Bank, to cite a typical blue-chip private-sector forecast, sees 2011 inflation running at 2.1 percent. QE2 also propped up the economy by bidding up the price, and thus lowering the yield, of Treasuries and other safe debt instruments. This encouraged investors to put their money into higher-yielding investments such as stocks, which reduced the cost of capital for businesses. And the Standard & Poor’s 500-stock index is indeed up 25 percent since last August. A cheaper dollar was an unstated, but obvious, consequence of QE2, and that too has occurred, arguably boosting U.S. exports.

But the negative consequences of QE2 — all of them also foreseeable — have canceled out some of the positives. Perhaps the most important of these was a commodity price boom, caused by the fact that many investors used the Fed’s freshly printed money to speculate on grain or oil. The winnings accrued to a wealthy few, while the U.S. middle class coped with higher prices for groceries and gasoline. And for all that, it is not even clear that the Fed achieved its primary goal of depressing the interest rate on long-term U.S. debt: The 10-year bond paid 2.5 percent when Mr. Bernanke announced QE2 but pays about half a percentage more than that today.

Economic growth has hardly taken off during QE2. Unemployment still lingers above 9 percent, and the Fed has lowered its 2011 growth forecasts from just over 3 percent to a bit less than 3 percent. Yes, the deflationary wolf has been chased from the door — but avoiding future inflation will be more difficult now that the Fed has a $2.7 trillion balance sheet to unwind.

To be sure, the picture might look very different if not for the disruptions wrought in the U.S. and global economies by the tsunami in Japan. And, like all other judgments about economic policy, any evaluation of QE2 must consider that things could have been even worse without it. Growth might have gone even lower and bond rates even higher if the Fed had not bought up the U.S. government's rapidly growing debt.

Still, it is hard to avoid the conclusion that this was, in the end, a holding action. QE2 was not so much an asset-buying program as a time-buying program — time for America’s households, firms and governments to deleverage and heal as best they could. QE2 is over and unlikely to be repeated; Mr. Bernanke was not kidding last August when he said, “Central bankers alone cannot solve the world’s problems.” Meanwhile, the prospects of much more fiscal stimulus seem doubtful. For better or worse, the U.S. economy may be on its own.