Quantitative Easing: Is It Working?

New data appears to support the theory that quantitative easing is working.

Fed Vice Chair Janet Yellen delivered a speech this weekend where she presented new data from a working paper drafted by the Federal Reserve Bank of San Francisco.

"Is the program actually proving effective? My short answer is yes," she said.

John McDermott, writing for the Financial Times blog Alphaville, excerpts and analyzes Yellen's source material.

McDermott writes: "Indeed, the San Francisco Fed economists' paper argues that without the (entire) asset purchase programme we'd be in a sticky deflationary scenario"

As the Fed's working paper says, " Inflation is currently a percentage point higher than would have been the case if the FOMC had never initiated the program, implying that the economy would now be close to deflation."

McDermott includes a graph showing price levels since 2005.

Not surprisingly, price levels dip rather dramatically in the middle of 2008—corresponding with the subprime mortgage and banking crises.

McDermott uses three different measures of PCE—personal consumption expenditure -as his index of inflation.

There are slight variations in the trend depending upon which measure is used—but straight, unadjusted PCE appears to rise rather dramatically in 2009 as QE1 ramped up.

Also, the PCE numbers peak in 2010, when Federal Reserve asset holdings under the program reached their highest levels.

And so it seems, at the high-level at least, that the data correspond to the stated goals of the Fed's policy initiatives.


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