John Cochrane on why the Fed's QE program has 'no effect'

The Federal Reserve Building in Washington
Raymond Boyd | Michael Ochs Archives | Getty Images

The Richmond Fed has a tremendously engrossing interview with the economist John Cochrane, the AQR Capital Management Distinguished Service Professor of Finance at the University of Chicago Booth School of Business.

Cochrane is fascinating because he is seriously engaged in discovering the way fiscal and monetary policy mix and interact. Here he is on why quantitative easing doesn't really do very much:

In my opinion, QE has essentially no effect. Interest rates are zero, so short-term bonds are a perfect substitute for reserves. QE creates a minor change to the maturity structure of government debt — and doubly minor because the Fed's effort to shorten maturity is essentially matched by the Treasury's new sales of long-term bonds. We've had much larger changes in the quantity and maturity structure of debt in the past with no big effect on the level of interest rates. You have to buy some new theory of very long-lasting flow effects, but I think coming up with new theories to justify policies ex post is a particularly dangerous kind of economics.

So I don't think the theory suggests QE can have a big effect. What about the evidence? Most of it comes from announcement effects. Even there, it's pretty weak: a 15-or-so basis point change in interest rates in return for a pledge to buy trillions in Treasuries. But interpreting announcements is tricky, and tells you a lot less about QE's effectiveness than you might think.