IHe is credited with preventing the worst global recession since at least WWII from turning into something much worse. But after trillions of dollars injected into financial markets to cushion the blow from Covid-19, the era of quantitative easing could come to an end.
This week, attention will turn to the gathering of central bank chiefs in Jackson Hole for clues as to how the US Federal Reserve plans to end its massive QE bond-buying program after more than ‘one year of emergency recovery.
Hailed as “Davos for central bankers” since its inception in the 1970s, the annual meeting in the remote resort town of Wyoming will have a different flavor this year as the pandemic hampers the return to normalcy.
Bank of England Governor Andrew Bailey will not be present, as usual, and there will be no Christine Lagarde, President of the European Central Bank. Due to the Covid disruption, the Federal Reserve Bank of Kansas City, organizer of the party, is hosting a smaller event this year, focusing on a national roster of speakers.
But investors will always follow meetings closely to gauge the future of global monetary policy, knowing that if the US central bank changes course, the global economy tends to follow.
The first indications came last week after the Fed signaled it was getting closer to cutting its bond purchases during the pandemic, in a development that rocked global markets. The Fed is buying $ 120 billion (£ 88 billion) per month in U.S. government bonds and mortgage-backed securities to keep long-term interest rates low and bond markets functioning well. But most officials now prefer to reduce the scale of purchases later this year.
That brings this week’s Jackson Hole speech by Fed Chairman Jerome Powell to a much more specific point, with investors looking for more solid clues on the timing and scale of “tapering,” the term used for. describe the reduction in quantitative easing.
However, prophecies for the beginning of the end have already been made, as the scale of QE has steadily increased since the 2008 financial crisis and has been taken to extremes by the pandemic.
Last month, the House of Lords Committee on Economic Affairs warned that the Bank of England risked becoming “addicted” to money creation and needed to shed light on its exit strategy. Jackson Hole could help reverse this trend, although most economists believe that the end of QE is some distance away, and that its reduction will be a slow and steady process.
In the US, some investors believe Powell will say little this week, preferring to wait until fall to give the Fed more time to see how the US economy is handling the spread of the Delta variant.
Major central banks now hold over £ 18 trillion in government bonds and other assets, an increase of over 50% from pre-pandemic levels: a breathtaking expansion from the financial crash of over ten years ago. Since the start of the pandemic, the Fed’s balance sheet has more than doubled to $ 8 billion (£ 5.9 billion). The European Central Bank has total assets worth over 8 billion euros (6.8 billion pounds sterling), the Bank of Japan has approximately 722 billion yen (4.8 billion pounds sterling), while the UK has doubled its quantitative easing program to £ 895 billion.
Critics would point out that despite the influx of cheap money, more than a decade of weak growth followed the 2008 crisis, with QE only succeeding in pushing up asset prices, which benefits the economy. more to owners of stocks and property. However, the recovery after 2008 has been undermined by governments that have launched damaging austerity policies, while central bankers say quantitative easing has helped avert even worse job losses.
The fact that the focus is on how central banks will reduce their money printing illustrates how far the global economy has grown since the first identified case of Covid.
However, it also comes at a delicate time as the economic rebound from foreclosure wears off, the risks of the Delta variant and disruption of supply chains affecting growth. While Jackson Hole may mark the beginning of the end of QE, expect this final act to be extremely long.