If QE2 is over, does that mean QA2 just started?
Everyone has been writing epitaphs for the 鈥渆nd鈥� of QE2, the Federal Reserve鈥檚 program to buy $600 billion in Treasury bonds.
In a narrow sense, they are right: the Fed just completed those purchases. What most coverage misses, however, is that the effects of 鈥渜uantitive easing鈥� depend at least as much on the Fed鈥檚 owning the bonds as buying them. The stock matters at least as much as the flow.*
The epitaphs apply only to the buying. The stock鈥揊ed ownership of $600 billion in Treasury bonds鈥搃s still with us.
Which brings us to today鈥檚 question: What should we call that? To say that QE2 is over leaves the impression that the program is over. It鈥檚 not.
One answer would be to expand the definition of QE2 to include the owning as well as the buying. In that case, we鈥檇 simply say that QE2 is still in place.
That strikes me as the cleanest solution except for one thing: almost everyone seems to want to believe that QE2 is over. So we need a new name.
To get some inspiration, consider the three stages of traditional monetary policy. You know, the kind where the Federal Reserve moves short-term interest rates up and down:
- Cutting rates (easing)
- Keeping rates low (accommodation)
- Raising rates (tightening)
The Fed鈥檚 asset purchases will go through three stages as well:
- Buying assets (quantitative easing)
- Owning assets (quantitative accommodation)
- Selling assets (quantitative tightening)
Stage 1, quantitative easing, just ended. When the Fed someday starts selling, that will clearly be quantitative tightening.
But what about stage 2? The best I can come up with is quantitative accommodation, QA for short.
That doesn鈥檛 really flow off the tongue, and better suggestions would be welcome.
For now, though, here鈥檚 my recommendation: If you insist on saying that QE2 is over, you should also be saying that QA2 just began.
* For example, here鈥檚 Chairman Bernanke discussing stocks and flows at his in April:
[W]e subscribe generally to what we call here the stock view of the effects of securities purchases, which鈥攂y which I mean that what matters primarily for interest rates, stock prices, and so on is not the pace of ongoing purchase, but rather the size of the portfolio that the Federal Reserve holds. And so, when we complete the program, as you noted, we are going to continue to reinvest maturing securities, both Treasuries and MBS, and so the amount of securities that we hold will remain approximately constant. Therefore, we shouldn鈥檛 expect any major effect of that. Put another way, the amount of ease, monetary policy easing, should essentially remain constant going forward from鈥攆rom June.
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