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What Is Quantitative Easing And Why Is It Likely To End?


And let's turn to the health of the U.S. economy and some big news expected this week. The Federal Reserve is likely to announce an end to a policy known as quantitative easing. It's a policy the Fed launched six years ago, buying trillions of dollars in bonds and mortgages in an effort to revive our faltering economy. Let's turn, as we often do, to David Wessel. He's director of the Hutchins Center at the Brookings Institution and a contributing correspondent to The Wall Street Journal. David, good to have you on again.

DAVID WESSEL: Good morning.

GREENE: So quantitative easing, what is it?

WESSEL: Well, at the end of 2008, the Federal Reserve cut short-term interest rates to zero and realized that wasn't nearly enough to get the economy moving again, so it embarked on a huge monetary experiment. First it bought a few hundred billion dollars of mortgages to unfreeze the housing market. And then it turned to buying long-term government bonds, often called treasuries. Over the ensuing six years, it ended up printing money to buy more than three-and-a-half-trillion dollars of bonds and mortgages. That's huge; it's far more than anybody inside or outside the Fed expected when this all began in 2008.

GREENE: OK, so the Fed's buying all of this stuff. How exactly is that supposed to help a troubled economy?

WESSEL: Actually, there's some dispute about the experts about all this. Ben Bernanke, the former Fed chairman, once said that quantitative easing works in practice but not in theory. Basically, the challenge to the Fed came when it cut the short-term rates to zero, the ones that are charged on overnight loans between banks. And then they tried something else, this quantitative easing.

One school views it as a way to push down long-term interest rates - the ones that we pay for mortgages, for instance. And taking mortgages and treasury bonds out of investor hands was meant to push those people to put money into other things - stocks and corporate bonds - and that was supposed to help to get business going.

Another school of thought said, that's not how it worked. It basically - by buying so many long-term bonds, the Fed was sending a very big signal that it was serious about keeping credit easy for a long, long time. Now, it probably worked through both channels, and it worked well enough that the European Central Bank is now considering something like what the Fed did. Fed officials and most, though not all, economists think QE did give the economy a boost when it needed it most, although there is some disagreement about how big that effect was.

GREENE: I love that phrase from Bernanke - it works in practice but not in theory. But there are some economists who don't even think it works in practice, right?

WESSEL: That's right. So one school says it doesn't work, doesn't do much good, or maybe it was OK, the first dollop of it in 2008-2009, and the rest of it was just wasted. Another view is that all this money sloshing around the economy is bound to create unwelcome inflation, although the fact that inflation is still running below the Fed's 2 percent target six years later has weakened this argument a lot.

A third crew says, oh, it was fine while it lasted, but now that we're at the cusp of the exit - the Fed is going to announce on Wednesday that it's cutting this off - we're going to see that we got hooked on this, and withdrawal's going to be hard. And then a fourth argument is that this is creating a whole lot of pockets of financial excess or bubbles, and we're got to get right back to where we were before. There are a few instances of that already, and the Fed assures us that it's going to be more careful this time.

GREENE: So why is this the moment when the Fed believes, you know, it's time to cut this off and to end it?

WESSEL: Well, the Fed has been gradually reducing the size of its purchases over the last several months, and it hasn't seen much adverse effect on the economy or the markets, at least not yet. Some Fed officials - a minority - have been itching to curtail this for a long time 'cause they never liked the idea. But even though the economy's not fully back to health and there's still less inflation than the Fed would like, most officials basically think the economy's strong enough to be weaned off this medicine. Though they're still worried enough that they tell us they're going to keep these short-term interest rates near zero well into 2015. And there are a few who think the Fed is ending this prematurely. I particularly like the line from Julia Coronado. She's an economist at Graham Capital. She wrote what she called an epitaph to QE; here lies QE, hated by its attracters, misunderstood, taken for granted. It lived a turbulent life and died before fulfilling its mandate.

GREENE: All right, David. Thanks as always.

WESSEL: You're welcome.

GREENE: David Wessel is director of the Hutchins Center at the Brookings Institution. You heard him, as you often do, here on MORNING EDITION from NPR News. Transcript provided by NPR, Copyright NPR.