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After more than two years, the Federal Reserve has taken financial markets off life support. Now we’ll find out how well the patient can breathe on its own.

Back in September 2012, with the economy limping along and price indexes setting off alarms about deflation, the Fed reached for extraordinary measures. Its prescription was a program of bond-buying that would eventually reach $1.6 trillion, on top of two earlier rounds that totaled $2.35 trillion.

The liquidity injection worked, at least to a degree: Unemployment fell from 7.8 percent in September 2012 to 5.9 percent two years later. Stock prices have risen 40 percent.

Inflation, meanwhile, remains stubbornly below the Fed’s target of 2 percent. The Fed’s favorite price measure is up just 1.5 percent in the latest 12 months.

Some measures of expected inflation have even been falling in the last two months. Nevertheless, the Fed decided last week to end its third round of quantitative easing, known as QE3 for short.

So, it’s time to ask: Did QE3 work?

That depends on your definition of success, says Paul Edelstein, chief economist at IHS Global Insight.

“If the objective was to keep the economy on track, then, yes, it did accomplish what the Fed set out to do,” Edelstein says. “Even with all the fiscal contraction we had last year, the economy continued to grow at the same rate it did the year before.”

Some people, however, might have expected more from $1.6 trillion in liquidity.

“If the objective was to foster a stronger economic recovery, we didn’t get there,” Edelstein adds. “Quantitative easing got us going in the right direction and mitigated some downside risk, but I think that is about the most you can say for it.”

QE3 seemed to have an immediate benefit in the fall of 2012 when 30-year mortgage rates fell as low as 3.35 percent, enabling people to refinance their homes and free up money to spend on other things. Mortgage rates remain about 4 percent, which is low by historical standards.

“It would appear that some of the Fed’s goals have been met,” says Brian Rehling, chief fixed income strategist at Wells Fargo Advisors. “They are still fighting some deflationary forces, although you can argue that inflation would have been a lot lower without the quantitative easing.”

Lindsey Piegza, chief economist at Sterne Agee in Chicago, said the benefits of QE3 weren’t as clear-cut as those of previous Fed actions. QE1 was launched in November 2008 to pull the nation out of a financial crisis, and QE2 started in late 2010 when a double-dip recession seemed like a real possibility.

“It’s very clear that the positive effects were diminishing over these three rounds,” Piegza asserts. That, she says, may be why the Fed was eager to end QE3 even before meeting its inflation goal.

If the Fed has done something three times, though, there’s a good chance it will do it again.

Edelstein and Rehling think the Fed is done buying bonds for this business cycle, but the economy will fall into recession again someday. If short-term interest rates only rise back to around 4 percent, as Fed officials themselves predict, a recession-fighting effort could take them back to zero quickly.

The next natural step would be QE4. What once seemed like a bold, risky policy has now become an essential instrument in the central bank’s resuscitation kit.

David Nicklaus is a columnist for the St. Louis Post-Dispatch.

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