Due to the rising stock market, a question I don’t hear a lot lately is the following; Has the FEDs’ quantitative easing program been successful? The program certainly helped stabilize the stock market after the financial collapse, when it was needed most. For this, it deserves an A+ for the programs first two years. But what about the last four years?
If you ask the FED, they will answer in the affirmative. But is that reality? The reality is that this has been the slowest economic recovery in history! In addition the recovery has been disproportionate to the wealthy and corporations who are able to leverage low interest rates and take advantage of a rising stock market.
If printing money and keeping interest rates low were the keys to jump-starting an economy, Japan would not be facing a recession and countries like Venezuela, which hold a lot of debt, would be quite prosperous.
Merely adding leverage through debt does not improve an economy. The disparity in economic recovery (employment levels, inflation) among countries in the Eurozone helps to demonstrate that added debt and low interest rates are not the sole stimulus for economic recovery. Getting more money into the hands of the majority of people to spend and increase demand is.
The Federal Reserve initially was going to end their program when unemployment dropped below 6.5% and inflation rose above 2%. Now the FED has decided to “kick the can” further, concentrating on increased wages for workers. In trying to be precise and “thread the needle” the FED has made their job more difficult when they try to deleverage and sell their holdings.
The very low interest rate environment has penalized savers and lifted the stock market to historically high valuations as investors seek yield. I am constantly hearing the following refrains, “Where else are you going to go for yield? “The U.S. market is the safest place to be.”
It’s a very difficult time to be an investor due to Fed policy. By over-optimizing the stipulations signaling an economic recovery, the Federal Reserve has left investors susceptible to economic shocks. Robust systems are able to weather financial storms better than highly optimized systems. The repercussions of continuing this “grand experiment” remain to be seen. There is no precedent for holding trillions of dollars in debt while keeping interest rates near zero but such a long period of time.