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9/18/13, "Poll: With the end of Fed's QE in sight, U.S. public says 'Huh?'," Reuters, Ann Saphir
"The Federal Reserve this week is expected to start winding down an
epic economic stimulus that is credited with helping the United States
claw back from the deepest slump since the Great Depression.
The Fed's $2.8 trillion "quantitative easing" program has, among
other things, lifted stock prices to record highs, driven interest rates
to record lows and put a floor under what had been a reeling housing
market.
Yet barely a quarter of Americans even know what it is.
A poll leading up to the Fed's pivotal decision, expected Wednesday
afternoon, found just 27 percent of U.S. adults could correctly pick the
correct definition of quantitative easing from among five possible
answers.
Quantitative easing, or QE for short, is when the Fed buys bonds in order to push down interest rates and boost the economy.
The ongoing Reuters/Ipsos poll included interviews with 857 adult
Americans between September 12 and 16. The result's credibility
interval, a measure of its accuracy, is plus or minus 3.9 percentage
points.
The Fed's bond-buying program, particularly the current third round
known as QE3, has been controversial both at home and abroad....
Twelve percent of respondents thought QE was a computer-assisted
program that the Fed uses to manipulate the dollar. Another 11 percent
thought it was part of the Dodd-Frank Wall Street reform legislation
enacted following the crisis.
To be sure, two of the more popular incorrect answers - "a way the
Fed makes it easier for commercial banks to borrow money from Fed and
relend it to consumers," and "when the Fed repeatedly lowers its
official interest rate" - were in the right ballpark, if not completely
on target.
After all, quantitative easing is geared to reducing borrowing costs.
But for a Fed that has emphasized how important communications are -
and how much the effectiveness of its policies depends on the public's
understanding of their impact on inflation and employment - the fact
that 73 percent of respondents cannot define the critical program
suggests the Fed has a serious communications challenge.
In particular, Fed officials have stressed how important it is that
the public does not equate a reduction in quantitative easing with a
rise in interest rates.
Nevertheless, the Fed's well telegraphed intention to pare back its
bond buying has raised interest rates over the last five months, and
markets will be watching closely for the size of the reduction.
If the public does not understand what QE is in the first place,
drawing that distinction will be difficult, said Scott Anderson, chief
economist at Bank of the West in San Francisco.
"I think they understand the Fed is trying to stimulate the economy,
but I don't think they understand the mechanics of how it works,"
Anderson said. That means, he said, "People get the message that
interest rates are going up."
And that can have negative effects for the economy, he said. Margaret Miranda, a 60-year-old home health aide who lives in Truth
or Consequences, New Mexico, was stumped by the question on quantitative
easing.
She works part time for $8 and $9 an hour, and says wages are not
keeping up with costs. She thinks unemployment is too high. But she did
not know the Fed is charged with maximizing employment and stabilizing
prices, let alone what quantitative easing is. She thought it might have
to do with regulation.
"I was asking my husband, if he'd heard anything, because he does
stocks and all that," she said in an interview. "He didn't really know
either."
To Michael Woodford, a Columbia University professor whose writings
on QE have been hugely influential at the Fed and other global central
banks, Miranda's lack of knowledge shouldn't matter.
"The beliefs of the general public... isn't the primary channel that the Fed has been relying upon," Woodford said.
More relevant, he said, is whether bond traders understand the Fed's
intent. If they drive interest rates down in response to QE, the
program can be effective if those low rates then drive spending.
Larchmont, New York, resident Lynda LaMonte, 49, lost her job in the
Great Recession and now works part time as a communications specialist
for an economic research firm.
She too picked the wrong definition for QE. But a conversation with
her made it clear that LaMonte understands the Fed's goals and,
specifically, the goals of its bond-buying program.
She supports a cutback. "It's almost like we've got Wall street dependent on that money," she said....
But to some, such a fuzzy understanding of what has become a critical monetary policy tool is not enough.
"When making investments, or taking out a loan, it's terribly
important that we understand how the decisions taken in Washington
affect us," said Carl Tannenbaum, Northern Trust's chief economist. QE is unlike the Fed's traditional tool of raising and lowering
short-term interest rates, and the public needs to understand its
benefits, and risks, to better inform their decisions.
"The Fed at times has not done a very good job of explaining what it
is up to," Tannenbaum said. "It's also fair to say that the state of
financial literacy in the United States offers important room for
improvement."" via mention on Red Eye radio
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