Would rates be higher if the Fed hadn't done QE?

I heard some funny discussion recently between two, typically out of paradigm folks on what would happen to interest rates if the Fed didn't conduct QE. One said that rates would be lower because there wouldn't have been "stimulus." The other said rates would have been higher because the Fed was the principal buyer of the government's paper and without that buying rates would have shot up.

First, it's important to understand that QE is just another monetary policy tool and these tools are all designed, or I should say, capable, of doing only one thing and that is change an interest rate somewhere along the term structure. In so doing the Fed changes the composition and duration of the financial assets held by the public. It's not stimulus, it doesn't enable gov't spending and it's not money printing. These are asset swaps, that's it, pure and simple.

We also know that a currency issuing government, like the U.S. Federal Government, spends by electronically crediting bank accounts and there is no constraint on its ability to do this other than the occassional political constraint, like when we have to go through these ridiculous debt ceiling shenanigans every now and then. Furthermore we know that when the government spends it adds to the level of bank reserves in the system and this accumulation of reserves causes the Fed to engage in monetary operations on a fairly regular basis (like, daily) to maintain reserves at a level that is consistent with whatever target interest rate they have decided upon. If the Fed were to allow reserves to build and build and build as a normal consequence of ongoing gov't spending, then the overnight lending rate (Fed Funds) would quickly fall to zero and all other rates out along the term structure would follow suit.

So the fact of the matter is the Fed has to work quite hard to KEEP RATES FROM FALLING TO ZERO ON THEIR OWN if the banking system were just left alone without its intervention. Those who say the Fed is keeping rates "artificially low" have got it backward. On the contrary, high rates or rising rates for a currency issuing nation are artificial.

The notion that rates would have been higher if the Fed had not done QE is false. Nor can one say thay rates would be lower absent QE because there "wouldn't have been any stimulus." That's patently absurd. QE simply was the Fed's way of reducing the rate on some specific instrument (mortgages, longer dated Treasuries, etc.) in the hopes that such a move would have some desired effect on the economy, despite the fact that the causal relationship there is spurious.