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QUANTITATIVE EASING – FRIEND OR FOE?


Quantitative easing (QE) was pioneered in its current form at the turn of the century by the Japanese, and adopted by a number of central banks in the wake of the 2007 global financial crisis (GFC). Its path to become a recognised and respected form of monetary policy is as uncharted as its long term efficacy. However, it may still become the primary policy tool of the future.


 Mario Draghi was unequivocal when he declared in December: “QE is part now of the tool box …it’s permanent”. This status was reinforced by law during the same month when the ECJ ruled against German- led proceedings objecting to its deployment. The ECJ decreed that QE “does not exceed the ECB’s mandate and does not contravene the prohibition of monetary  remain concerned that the operation prolongs, instead of addresses the Eurozone’s structural 


Turning our attention to the focus of this article, the  Fed boosted its balance sheet from just under $1tn before the crisis to a peak of $4.5tn in 2014. QE was, however, just one driving force of many used to restore the stricken US economy. As former BIS head and QE- sceptic, Jaime Caruana, noted in 2014:


“The Americans were quite aggressive in forcing recognition of losses and there was a very rapid recapitalisation of the banks. This is why it was successful. The role of quantitative easing is an open question.”


QE WAS, HOWEVER, JUST ONE DRIVING FORCE OF MANY USED TO RESTORE THE STRICKEN US ECONOMY.


14 | ADMISI - The Ghost In The Machine | March/April 2019


After a period of sustained, if unspectacular GDP growth and a marked increase in CPI, the Fed  December 2015 via a Fed Funds rate increase. But the removal of monetary accommodation really began in earnest in December 2017, when the termination of reinvestment activity on the Fed’s balance sheet punctuated three rate hikes that year. Ceasing asset reinvestment marked the reversal of QE; proceeds from maturing US Treasuries and mortgage-backed securities were no longer rolled over in order to maintain holdings. Instead, the cash was released  – the beginning of the end of almost ten years of extraordinary unconventional US monetary policy.


It naturally follows that, notwithstanding some FOMC member opinions – including Fed Chair Jerome Powell’s – the reversal of QE is just as powerful a policy tool as its instigation, though not necessarily with symmetrical results. The questions which follow are, therefore: how quickly can (or indeed should) the Fed ‘normalise’ its balance sheet? Where should the ‘new normal’ be? Will the receding tide expose any weakness in the US programme of structural reforms? Could an uglier past be revealed?


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