The Economist - USA (2021-07-10)

The Economist July 10th 2021 65

Finance & economics

Quantitativeeasing

The quest to quit QE

T

he debateover  the  effect  on  markets
and the global economy of quantitative
easing  (qe),  the  purchase  of  bonds  with
newly  created  money,  is  almost  akin  to  a
culture  war.  To  its  critics  unrestrained  qe
during the pandemic has covertly financed
governments  while  inflating  asset  prices
and boosting inequality. To its fans qeis an
essential  tool  in  which  economists  have
justified  and  growing  confidence.  This
high­stakes debate is about to enter a new
phase.  Rich­world  central  banks’  balance­
sheets  will  have  grown  by  $11.7trn  during
2020­21,  projects  JPMorgan  Chase,  a  bank
(see chart 1 on next page). By the end of this
year  their  combined  size  will  be  $28trn—
about three­quarters of the market capital­
isation  of  the  s&p500  index  of  stocks  to­
day.  But  central  bankers  are  about  to  turn
this mega­tanker of stimulus around. 
The  justifications  for  qehave  almost
dissipated.  At  the  start  of  the  pandemic,
central  banks  bought  bonds  to  calm  pan­
icky  markets  amid  a  flight  to  safety  and  a

dash for cash. Then it became clear that the

pandemic  would  cause  a  huge  economic

slump that would send inflation plummet­

ing; qewas needed to stimulate the econ­

omy. Today, however, markets are jubilant

and inflation is resurgent (see Briefing). 

In  America  it  looks  increasingly  weird

that the Federal Reserve is the biggest buy­

er of Treasuries, as it was in the first quar­

ter  of  2021.  The  economy  is  powering

ahead.  In  June  it  added  a  heady  850,000

jobs,  according  to  figures  released  on  July

2nd.  On  Wall  Street  cash  is  so  abundant

that  over  $750bn  gets  parked  at  the  New

York  Fed’s  reverse­repo  facility  most

nights,  mopping  up  some  of  the  liquidity

injected  by  qe. On  June  30th  it  absorbed

nearly $1trn. The Fed’s purchases of mort­

gage­backed  securities,  given  America’s

red­hot housing market, now look bizarre.

Some central banks have already begun

to scale back their purchases. The Bank of

Canada  began  curtailing  the  pace  of  its

bond­buying in April. The Reserve Bank of

Australia said on July 6th that it would be­

gin  tapering  its  purchases  in  September.

The  Bank  of  England  is  approaching  its

£895bn ($1.2trn) asset­purchase target and

looks likely to stop qeonce that is reached;

Andrew  Bailey,  its  governor,  has  mused

about  offloading  assets  before  raising  in­

terest  rates,  contrary  to  the  normal  se­

quencing. In May the Reserve Bank of New

Zealand  said  it  would  not  make  all  of  the

nz$100bn  ($70bn)  asset  purchases  it  had

planned to. And the European Central Bank

is debating how to wind down its pandem­

ic­related scheme.

By  comparison  the  Fed  has  been  reti­

cent.  Last  month  Jerome  Powell,  the  Fed’s

chair, said that the central bank is “talking

about talking about” tapering its purchases

of  assets.  Minutes  of  the  meeting  preced­

ing his comments, released on July 7th, re­

vealed that officials thought it “important

to be well­positioned” to taper. Most econ­

omists  expect  an  announcement  by  the

Central banks face up to the daunting task of shrinking their presence
in financial markets

→Alsointhissection

67 Buttonwood:Convertiblebonds

68 A newkindofriftwithinOPEC

68 SPACsv privateequity

69 ForeigninvestmentinAfrica

70 Free exchange: Wealth inequality