QE For Life?

International | Apr 09 2019

As the world slides back into easy monetary policy to avert slowing growth, Saxo Bank contemplates the potential for another decade of quantitative easing.

-Fed, ECB step away from monetary tightening
-Germany at risk of recession
-Global QE may be necessary for some time
-Shift to de-globalisation

By Greg Peel

“Our country’s doing unbelievably well economically,” President Trump told reporters on Friday after US data showed a forecast-beating 196,000 jobs were created in March.

Yet Trump said that he believes the Fed “really slowed us down” in imposing four rate hikes last year which he said were unnecessary because there is “very little if any inflation.”

“In terms of quantitative tightening, it should actually now be quantitative easing,” Trump said. “I think they should drop rates, and they should get rid of quantitative tightening. You would see a rocket ship.”

The US Federal Reserve implemented “quantitative easing” -- using money printed by the US Treasury to first buy government bonds and then corporate bonds and mortgage-backed securities – in 2009 as a means of providing further stimulus to a US economy in the wake of the GFC when dropping its cash rate to zero had not proven sufficient. Further QE programs continued through to 2013, at which point the Fed decided it was time to start “tapering” its bond purchases.

Eventually the Fed stopped buying more bonds, but continued to replace maturing bonds in order to maintain its balance sheet. In December 2015, the Fed implemented its first post-GFC rate hike. By December 2018, the Fed had hiked nine times, and also commenced a wind-down of its balance sheet by no longer replacing maturing bonds – a process dubbed “quantitative tightening”.

The catch-phrase for 2017 – the first Year of Trump – was “synchronised global growth”. There was little argument from markets that the Fed was justified in returning its policy stance to “normal”. By 2018, which we might dub the Year of Tariffs, synchronised global growth had swung to solitary US growth. By late 2018 it began to appear even the US could not remain isolated from a global slowdown. Stock markets tanked in the December quarter.

The Fed responded by “pivoting” to a neutral stance, implying no more rate hikes unless data suggest otherwise.

Now Trump is suggesting the Fed not only cut its cash rate, but reinstate QE, despite an economy “doing unbelievably well”. Two points to note:

The US stock market (S&P500) is currently not far off its all-time high of last September, which represented a 340% rally from the 2009 low.

Global debt levels have now exceeded US$250trn. The peak prior to the Global Financial Crisis was US$175trn.

Europe

The Fed was quick to move in response to the GFC. The European central bank was not. Only when the eurozone threatened to implode did new ECB president Mario Draghi vow to do “whatever it takes”, which ultimately meant a negative cash rate and a QE program.

In 2017 – the year of synchronised global growth – Draghi began preparing the market for the end of QE and a first post-GFC rate hike. Last month Draghi declared the ECB “ready to act” to avert slowing growth. Trump’s radical suggestions aside, the Fed has lifted its cash rate incrementally to 2.25-2.50% and if needed, can incrementally reduce it once more. The ECB cash rate remains negative. Nowhere to run to.


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