Economists in Jackson Hole Say QE Less Potent Than Fed Believes

Arvind Krishnamurthy (Northwestern) and Annette Vissing-Jorgensen (UC Berkeley) wrote a paper which scrutinized the Fed's support of QE.  The authors believe that the Fed's participation in the mortgage market (via purchases of MBS) had a greater impact on the private economy than buying government securities, the traditional method in which the Fed influences rates.

It may be a tell tale sign that most of FOMC members that have taken part in the decision making process for QE will be leaving the Fed over the next year or so.  There has been great debate not only on who will be the next head at the Federal Reserve (Yellen or Summers), but also whether or not Bernanke is leaving by his own accord.  In any event, I don't view a change in leadership at the Fed as a positive development at this point in the cycle.  If Bernanke is being forced out, you wonder if its because of his public critique of the government's inability to develop expansionary policies.  If Bernanke is quitting, one couldn't help but ponder if its because he doesn't want to be front and center in another crisis.  Especially if it's one that he helped create through unorthodox monetary policies.

Despite working through narrower channels, the Fed’s buying of mortgage-backed securities in QE3 has been more effective at boosting the economy through its effect on mortgage rates, according to the paper.

“The Fed’s cessation of MBS purchases or sale of MBS are likely to be more economically important for the private sector than a sale of Treasury bonds, which by itself will affect mainly government borrowing costs,” according to the paper. “There is little evidence for the operation of a broad channel through which large-scale asset purchases lower the yield on all long-term bonds.”

Via Bloomberg