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WSJ: QE 2 Proves No Silver Bullet

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WSJ: QE 2 Proves No Silver Bullet

Found this article from the Wall Street Journal's business section interesting. Analysts and investors are reviewing the pros and cons of the Fed's $600 billion bond-buying program, which is set to end as scheduled at the end of June.

The following are excerpts from the larger analysis; to view the entire article in its original location, follow this link.

Leave your own impressions of the QE 2 in the comments!

QE 2 Proves No Silver Bullet

Fed Program Keeps Deflation at Bay but Ends Amid Weak Economy and Dollar

By JON HILSENRATH

Federal Reserve officials have been warning for months that the controversial $600 billion bond-buying program they initiated last year wouldn't be a panacea for an ailing U.S. economy. That's one forecast they seem to have gotten right.

The program—known as the central bank's second round of quantitative easing, or QE2—will end on schedule this month with a mixed legacy, having proved to be neither the economy's needed elixir nor the scourge that critics describe.

Fed officials, who conclude a two-day policy-making meeting Wednesday, launched the program in November. They hoped it would prevent very low inflation from giving way to a Japan-style bout of deflation—a fall in the overall consumer price level that drags the economy down with it.

They also sought to stir the economy by holding down long-term interest rates, boosting prices for stocks, corporate bonds and other financial assets. More job growth, they argued, would follow.

They succeeded in putting deflation worries to rest. But economic growth is slower now than it was when the program was enacted, the job market has sputtered after a spurt, and the financial-market impact has been a mix of good and bad. Stock prices are higher and corporate-bond yields lower, which helped growth. But prices for oil, grains, and other commodities have surged, pinching consumers.

Though Fed officials didn't state it as a goal, another outcome of the program was likely the continued slide in the dollar, which is both a blessing and a curse for the economy. A weaker dollar makes U.S.-made goods cheaper on world markets, increasing exports, but also increases the cost of imported goods and thus feeds inflation. The dollar was on its way down before the Fed easing started and has continued on that path.

In all, the economy looks to have grown at a 2% annual rate in the first half of the year, the slowest six-month stretch of the recovery.

"You don't want to fool yourself into thinking that the Fed has some kind of power to solve all of our problems," said James Hamilton, an economist at the University of California at San Diego.

The QE2 program unleashed a backlash domestically and abroad. Critics say the central bank pushed up commodities prices by pumping too much money into the financial system and weakening the dollar, fueling higher inflation around the world.

Some of this criticism is likely overstated. Crude-oil prices hovered around $75 a barrel for a month after Fed Chairman Ben Bernanke made his QE intentions clear in an August 2010 speech in Jackson Hole, Wyo. Prices surged above $100 a barrel only after political turmoil erupted in the Middle East early this year.

Fed officials say commodities- price inflation is driven primarily by global demand, particularly from fast-growing economies like China.

Under the Fed's program, it will have purchased $600 billion of U.S. Treasury securities between November and June. In the process, it is pumping money into the financial system. Fed officials argue that by reducing the supply of long-term bonds in the hands of private investors, the purchases helped to hold down long-term interest rates, easing financial conditions.

View the full article and the rest of the analysis on QE 2 here.

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