WASHINGTON—At least some of the Federal Reserve’s bond buying in the wake of the 2008 financial crisis bolstered employment, according to a recent paper by staffers at the central bank’s board of governors.
The third round of such purchases, also known as quantitative easing, starting in late 2012, spurred banks with large holdings of mortgage-backed securities to lend more to companies, authors Stephan Luck and Tom Zimmermann found. Shortly thereafter, U.S. counties with such banks saw faster employment growth—up to 0.4 percentage point more per quarter—than counties where banks held fewer mortgage-backed securities.
Employment growth in the two sets of counties was similar for more than 18 quarters before the implementation of QE3, as the program was known.
The findings come as policy makers continue to debate the full impact of the unconventional stimulus measures taken by the Fed after interest rates, reduced to near zero by the end 2008, had no more room to fall. While the central bank’s asset purchases lowered long-term borrowing costs and delivered a boon to financial markets, economists have often questioned whether they spurred employment.
“Our study is the first to document a link between the Federal Reserve’s quantitative easing (QE) and employment outcomes,” Messrs. Luck and Zimmerman wrote in the paper, published last month. “Our evidence suggests that [large-scale asset purchases] can, similar to reductions of interest rates in times of conventional monetary policy, affect real economic outcomes via a bank lending channel.”
To conduct their analysis, the authors looked at confidential data on commercial and industrial loans that banks with more than $50 billion in assets are required to report to regulators. They matched the loan-registry data to annual employment figures associated with firms’ tax-identification numbers. This “allows us to link banks’ credit supply directly to firm investment and employment decisions.”
The Fed conducted three rounds of QE between 2008 and 2014, ultimately purchasing trillions of dollars of mortgage-backed securities and Treasury debt. Policy makers’ objective, particularly with QE3, was to push banks to take on more risk to spark faster economic growth.
The first round of QE, announced in the depths of the financial crisis, primarily caused greater bank lending in the form of mortgage refinancing, Messrs. Luck and Zimmerman found. While this appeared to increase household net worth and spurred local demand, it didn’t translate into broader employment growth.
Because QE2 involved only the purchase of Treasury debt—not mortgage-backed securities—it didn’t trigger more lending by banks holding large volumes of mortgage-backed securities.