Paul Lachine

Quantitative Easing and America’s Economic Rebound

There is no doubt that the US economy rallied strongly at the end of 2010. But much of the growth was due to the Federal Reserve’s policy of “quantitative easing,” which pumped up equity prices and thus consumption – and which will be phased out in 2011.

CAMBRIDGE – There is no doubt that the American economy rallied strongly at the end of 2010. But how much of that was due to the United States Federal Reserve’s temporary policy of so-called “quantitative easing”? And what does the answer mean for the US economy in 2011?

Until the fourth quarter of last year, the US economic recovery that began in the summer of 2009 was decidedly anemic. Annual GDP growth in the first three quarters of 2010 averaged only about 2.6% – and most of that was just inventory building. Without the inventory investment, the growth rate of final sales averaged less than 1%.

But the fourth quarter was very different. Annual GDP rose by 3.2% and growth of final sales jumped to a remarkable 7.1% year-on-year rate. True, much of that was due to a sharp decline in imports; but even the growth rate of final sales to domestic purchasers rose at a healthy 3.4% pace.

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