The NAFCU Journal May-June 2020 - 10

THE BOTTOM LINE

Thinking Outside the Box
By Curt Long

E

conomists, it must be admitted,
enjoy playing the provocateur. Why else are we always
sticking our noses where they
don't belong, or trying to quantify the
unquantifiable? Perhaps this penchant
for irritation even penetrates the walls
of the Federal Reserve. If so, it may help
to explain the affinity held by the central
bank for its most controversial policy
tool: quantitative easing (QE).

While the U.S. central bank brought
the notion of QE to the attention of
the American public, Ben Bernanke
did not invent it. Japan engaged in QE
beginning in 2001 to address persistent
deflation. Bernanke has made the Bank
of Japan's conduct of monetary policy a special area of focus in his own
research, and at times he advocated
that Japan consider far more radical
approaches than QE to address their
substantial challenges. By comparison
to those other tactics, QE seems relatively benign. So during the financial
crisis, when traditional ammunition
was exhausted with short-term rates
at zero, it is no surprise that Bernanke
turned to QE. He chaired a Fed board,
that authorized three rounds of asset
purchases from 2008 through 2012, in
the process expanding the Fed's balance
sheet from about $900 billion to more
than $4 trillion. So began a debate,
which continues to this day, over the
spillover effects of large-scale asset purchases on inflation, equity valuations
and financial stability.
Since 2018, the Fed has been engaged
in a review of its monetary policy
framework. Part of that project includes
committing to the set of tools the Fed
10

intends to deploy for future (or current)
crises. While additional tools are under
consideration, the Fed has already stated
its intention to use QE as a regular part
of its toolbox. As if to emphasize the
point, in March the FOMC announced
another round of QE in concert with
a reduction of the federal funds rate
to zero. Given that it will continue
to feature prominently during future
downturns, it is worth reviewing the
functionality and efficacy of QE.

The Channels

While debate about the effectiveness
of QE continues, economists generally
agree about how it works. The first channel is the "portfolio effect." By engaging
in large-scale purchases of long-term
U.S. Treasuries and agency securities,
the Fed is reducing the supply of safe
assets. A sizable demand exists for
safe assets, arguably driven higher by
regulatory requirements. Investors will
naturally bid up the prices on remaining
THE NAFCU JOURNAL  MAY-JUNE 2020



The NAFCU Journal May-June 2020

Table of Contents for the Digital Edition of The NAFCU Journal May-June 2020

The NAFCU Journal May-June 2020 - Cover1
The NAFCU Journal May-June 2020 - Cover2
The NAFCU Journal May-June 2020 - 1
The NAFCU Journal May-June 2020 - 2
The NAFCU Journal May-June 2020 - 3
The NAFCU Journal May-June 2020 - 4
The NAFCU Journal May-June 2020 - 5
The NAFCU Journal May-June 2020 - 6
The NAFCU Journal May-June 2020 - 7
The NAFCU Journal May-June 2020 - 8
The NAFCU Journal May-June 2020 - 9
The NAFCU Journal May-June 2020 - 10
The NAFCU Journal May-June 2020 - 11
The NAFCU Journal May-June 2020 - 12
The NAFCU Journal May-June 2020 - 13
The NAFCU Journal May-June 2020 - 14
The NAFCU Journal May-June 2020 - 15
The NAFCU Journal May-June 2020 - 16
The NAFCU Journal May-June 2020 - 17
The NAFCU Journal May-June 2020 - 18
The NAFCU Journal May-June 2020 - 19
The NAFCU Journal May-June 2020 - 20
The NAFCU Journal May-June 2020 - 21
The NAFCU Journal May-June 2020 - 22
The NAFCU Journal May-June 2020 - 23
The NAFCU Journal May-June 2020 - 24
The NAFCU Journal May-June 2020 - 25
The NAFCU Journal May-June 2020 - 26
The NAFCU Journal May-June 2020 - 27
The NAFCU Journal May-June 2020 - 28
The NAFCU Journal May-June 2020 - 29
The NAFCU Journal May-June 2020 - 30
The NAFCU Journal May-June 2020 - 31
The NAFCU Journal May-June 2020 - 32
The NAFCU Journal May-June 2020 - 33
The NAFCU Journal May-June 2020 - 34
The NAFCU Journal May-June 2020 - 35
The NAFCU Journal May-June 2020 - 36
The NAFCU Journal May-June 2020 - 37
The NAFCU Journal May-June 2020 - 38
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The NAFCU Journal May-June 2020 - 40
The NAFCU Journal May-June 2020 - 41
The NAFCU Journal May-June 2020 - 42
The NAFCU Journal May-June 2020 - 43
The NAFCU Journal May-June 2020 - 44
The NAFCU Journal May-June 2020 - Cover3
The NAFCU Journal May-June 2020 - Cover4
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