The NAFCU Journal May-June 2020 - 11

safe assets, reducing their yield. These
effects may spill over into other, less safe
assets, such as corporate bonds.
The second key mode for QE operation
is the signaling channel. Even after a
central bank reaches the zero lower
bound with its interest rate, it can
further ease conditions by convincing markets that the rate will remain
anchored at zero for some length of
time. QE provides the opportunity to
send that signal credibly. Following
purchases of safe assets, if the central
bank raises rates too soon while still
holding those assets, it runs the risk
of taking a loss if the market value
declines. It is understood that the Fed
would strongly prefer to avoid doing so,
as it could cause some to question the
Fed's independence.

reserves used to purchase the assets
would result in hyperinflation. While
research seems to suggest some inflation did result from QE, it is at a level
that is actually welcomed by the Fed
in light of the persistent undershoot
of its inflation target. As the risk of
hyperinflation abated, criticism grew
that QE was inflating prices, not of
consumer goods but of financial assets.
Here again, there is evidence that this
has occurred, though perhaps not at the
level critics suggest. The bull market
following the Great Recession was a
remarkable period for a broad class of
assets, but there did not appear to be
overwhelming evidence of financial
instability prior to the onset of the
COVID-19 crisis, which marked the

end of the bull run. It is also worth noting that asset values continued to appreciate even when the Fed was tapering
the size of its balance sheet.
While central bankers may take solace
in the belief that another tool has been
added to the toolbox, it is less comforting for financial institutions that rely
on a positively sloping yield curve for
their survival. A commitment to QE
is a commitment to look for stimulus
further down the yield curve. This likely
means flatter yield curves even in good
times, and certainly during and following economic downturns.
Curt Long is NAFCU's chief economist
and vice president of research.

The Impact

To the question of whether QE accomplished what it set out to do, one study
after another offers a resounding "yes."
Estimates vary, but the body of academic research has concluded that QE
did reduce long-term yields. According to one survey of the research, the
median size of the impact on 10-year
Treasury yields was 1.2 percentage
points. Using the Fed's economic forecast model, Bernanke has estimated
that the success of QE means that the
two nontraditional tools used following
the Great Recession (QE and forward
guidance) provide the FOMC with as
much stimulus as 3 percentage points
of reductions to the federal funds rate.
If true, these tools provide a valuable
counterbalance to the decline in real
interest rates over the past few decades,
which has reduced the available space
for the Fed's primary tool, the federal
funds rate.
Since its inception, critics have warned
of the dire consequences of QE. It was
thought that the flood of central bank
THE NAFCU JOURNAL  MAY-JUNE 2020

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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
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The NAFCU Journal May-June 2020 - 21
The NAFCU Journal May-June 2020 - 22
The NAFCU Journal May-June 2020 - 23
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The NAFCU Journal May-June 2020 - Cover3
The NAFCU Journal May-June 2020 - Cover4
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