The end of QE...again?

The US Federal Reserve is finally concluding its asset purchase programme, a form of monetary stimulus popularly described as quantitative easing (QE).

Actually, to be more accurate, the Fed is ending its third round of QE. It's good to remember that this is Exit No 3, because it means No 4 cannot be ruled out.

The chances that the Fed will have to or want to embark on a fourth round of easing are probably much lower, though. We took a look at how the end of QE3 stacked up against the end of QE1 and QE2, and the US economy does seem to be on firmer footing this time.

Of course, it's also important to note that the only reason the Fed has done three rounds of easing is that it is facing the problem of the zero lower bound. Because the Fed's short-term rate-setting mechanism is now set so low that it cannot go any lower (the Fed can't set front-end rates below zero), when it wants to provide stimulus it has to work on the longer end of the yield curve, and QE just happens to be the tool that lets it do so. There is an argument that the further away the US moves from the risk of a financial catastrophe, the less effective QE will be. That is true, but the counter is that, (1) QE was never intended to be used except in exceptional circumstances; and (2) the Fed doesn't have that many other options with its back against the zero lower bound. So if the US economy takes an unexpected step backwards and the Fed feels like it has to step in again, we may yet see another round of QE.

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