Fed's bond buying hasn't boosted stocks, McKinsey study finds

Wed Nov 13, 2013 7:03pm EST
 
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By Ann Saphir

SAN FRANCISCO (Reuters) - There is no evidence that the Federal Reserve's massive bond-buying effort has led U.S. stock prices higher, according to a report released on Wednesday by the economics research arm of McKinsey & Company.

Instead, study co-authors Richard Dobbs and Susan Lund found that the biggest impact of quantitative easing by the world's major central banks has been the cost-savings delivered to governments. Since 2007, bond-buying programs in the United States, the UK and the euro zone have reduced costs for governments by a total of $1.6 trillion.

The finding will come as a surprise to many investors who attribute the rise in stock prices in the United States and elsewhere since the 2007-2009 financial crisis at least in part to easy central bank policies.

All told, major central banks have added $4.7 trillion to their balance sheets over the past five years in an effort to push down long-term borrowing costs while keeping short-term interest rates low.

The findings are sure to resonate among central bankers as they debate when and how fast they may be able to scale down the monetary stimulus they have used to keep deflation at bay and try and pull ravaged economies from the depths of recession.

Higher stock prices are often thought to boost household spending because of the wealth effect -- as net worth rises with gains in equity portfolios, people part more freely with their cash.

But quantitative easing does not appear to be driving this kind of wealth effect through rising equity prices, the McKinsey researchers found.

The major boost comes from massive savings to governments that have freed them to borrow and spend more than they otherwise would have, translating to fewer jobs lost than otherwise, the researchers found.   Continued...

 
A view shows an eagle sculpture on Federal Reserve building, on the day it will release minutes of Federal Open Market Committee from August 1, 2012, in Washington August 22, 2012. REUTERS/Larry Downing