Thank the Fed for the 'Resilient' Economy

It's taking longer than anybody would like, but the Fed's easy-money policies are finally working.

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Some analysts say that QE3 faces the problem of diminishing returns the longer it goes on.

It's getting awfully hard to argue that the Federal Reserve isn't helping the economy.

The Fed began its controversial quantitative easing strategy more than four years ago, and a lot of people have been wondering when it's going to work its magic. Most Fed critics point to the unemployment rate, which is still highly elevated at 7.9 percent. Plus, the economy is still growing slowly and the recovery we're supposedly in is the weakest in 70 years.

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But the economy is, in fact, showing tangible improvement in four key areas, and Fed policies are at least partly responsible. In general, the Fed has used a variety of tactics to push interest rates to abnormally low levels, in order to spur borrowing, force investor money out of bunker-mentality securities like Treasury bonds, and stimulate normal types of economic activity after a panicky recession. There's no modern precedent for what the Fed has done, so nobody really knows how long it's supposed to take for quantitative easing to work.

But it is working, finally. Here's the evidence:

1. The housing market has turned around. The housing bust began in 2006 and ended in 2012. Average prices fell by about 31 percent during that time, according to the Fiserv Case-Shiller index. But housing has now flipped from a drag on the economy to a sector that's creating jobs and contributing to growth, which is one of the indirect ways the Fed hopes to lower the unemployment rate.

Three factors are now powering the housing sector: More affordable prices, easing credit standards that allow more buyers to qualify for mortgages, and low interest rates engineered by the Fed. It took a long time for the housing market to recover, but there was probably no other way to work through millions of foreclosures and allow prices to find an equilibrium. Without low interest rates, it almost certainly would have taken longer.

2. Auto sales are strong. Annual auto sales peaked at more than 17 million in 2005, then fell by 40 percent from that level during the recession. This year, automakers are likely to sell about 15.5 million cars, which represents a solid recovery that's helping bring back jobs and contribute to growth. The car industry is recovering faster than housing, because lenders have been more willing to grant auto loans than mortgages—including to subprime borrowers. As with housing, low rates have lured buyers, and even prompted them to spend more, since the monthly payments are lower than they'd otherwise be. reports that the average price of a new car has risen by more than $2,000 during the last three years, to nearly $31,000.

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3. The stock market is booming. The S&P 500 index has soared by 132 percent from the low point it reached in March 2009, and the Dow Jones Industrial Average has even eclipsed the prior all-time high set in Oct. 2007. During the last four years, the rising market has almost directly coincided with intensifying QE announcements from the Fed. That makes sense, since QE is designed to force investor money out of low-yielding bonds into riskier assets like stocks. It seems to have worked, and the stock-market rebound has restored virtually all the financial wealth lost during the market plunge in 2008 and 2009.

4. The economy is weathering fiscal austerity. Forget the invisible hand. The Fed is more like an invisible fork lift that's propping up the economy at the same time politicians in Washington are harming it. The tax hikes that went into effect at the start of the year and the "sequester" spending cuts that just began will help reduce federal deficits, but they'll also cut GDP growth by a full percentage point or so this year. Upcoming battles over the expiration of government funding and the federal borrowing limit could represent further hits to the economy.

Yet the stock market has remained buoyant and other indicators show the economy continues to hum along—largely because Fed Chairman Ben Bernanke has said the Fed is committed to its easing strategy.

"With the sequester representing yet another headwind, the Fed is even more likely to take its time before withdrawing monetary accommodation," investing firm BlackRock advised clients recently. "This [has] reassured investors, who were growing increasingly nervous over the possibility of an early end to quantitative easing."

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The unanswered question about the Fed's unprecedented stimulus measures is what will happen when it comes time to rein them in. Fed critics have complained about the risk of runaway inflation since QE began, and while their worries turned out to be premature, troublesome inflation is still possible if the economy heats up. There's also a risk that easy money has created a bubble in stocks or other assets, which has certainly happened before.

Without the Fed's easy-money policies, there'd be less risk of future inflation or asset bubbles, but only because the economy would still be hobbled and stock values would be lower. Some day, we'll know which was the better course to take.

Rick Newman's latest book is Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.