The Fed’s Quantitative Easing Program Cost Too Much

America’s experiment with quantitative easing is almost over. This week, the Federal Reserve will likely announce plans to slow the shrinkage of its balance sheet, foreboding the end of a long period in which it sought to stimulate the economy by holding large quantities of Treasury and mortgage securities.

So did it work? Yes, but at excessive cost.

Without doubt, quantitative easing had benefits. When the onset of the pandemic convulsed financial markets in March 2020, the Fed’s asset purchases kept funds flowing and stabilized prices. Over the next two years, they pushed down longer-term interest rates, providing economic stimulus at a time when the central bank determined it couldn’t lower short-term rates any further.

Yet one must consider the costs of the Fed’s asset-purchase program, too. First, by lowering rates on mortgage loans, it over-stimulated the housing market. Demand soared, driving up home prices and overall inflation.

Second, it contributed to last year’s regional-banking turmoil. The cash the Fed paid for securities turned up as deposits, a flood of money that banks had to manage. The institutions — such as Silicon Valley Bank — that foolishly invested such runnable deposits in long-term, fixed-rate securities have themselves to blame. Still, the Fed bears responsibility for creating the flood in the first place — something it failed to acknowledge in its otherwise candid post mortem last May.