IShe is credited with preventing the worst global recession since at least World War II from getting much worse. But after injecting trillions of dollars into financial markets to cushion the blow from Covid-19, the era of quantitative easing may be coming to an end.
This week, attention will turn to the central bank governors’ meeting in Jackson Hole for clues as to how the US Federal Reserve plans to end its massive QE bond-buying program after more than a year of emergency stimulation.
The annual get-together at the remote Wyoming resort, known as “Davos for Central Bankers” since it was founded in the 1970s, will have a different flavor this year as the pandemic prevents a return to normal.
The Governor of the Bank of England, Andrew Bailey, will be absent, as usual, and Christine Lagarde, President of the European Central Bank, will not be present. Due to the Covid disruption, the Federal Reserve Bank of Kansas City, organizer of the Bash, is hosting a smaller event this year that will focus on a domestic list of speakers.
However, investors will continue to watch the sessions closely to gauge the future of global monetary policy, knowing that the world economy tends to follow if the US Federal Reserve changes course.
Leading central banks now own more than £ 18 trillion in government bonds and other assets, up more than 50% from pre-pandemic levels
The first signs of this came last week after the Fed signaled it was getting closer to reducing its pandemic-era bond purchases, which rocked global markets. The Fed buys $ 120 billion (£ 88 billion) a month in US Treasuries and mortgage-backed securities to keep longer-term interest rates low and bond markets to run smoothly. But most officials are now advocating a reduction in purchases later this year.
This puts much sharper focus on Fed Chairman Jerome Powell’s Jackson Hole speech this week as investors look for stronger clues about the timing and extent of “tapering,” the term used to denote the reduction of energy To describe QE.
Prophecies of the beginning of the end were made earlier, however, as the extent of quantitative easing has been increasing steadily since the 2008 financial crisis and driven into overdrive by the pandemic.
Last month, the House of Lords Economic Committee warned that the Bank of England is at risk of becoming “addicted” to money creation and that it needs to clarify its exit strategy. Jackson Hole could help turn that tide, although most economists believe the end of QE is still a long way off and that regression will be a slow and steady process.
In the US, some investors believe that Powell will not have much material to say this week and prefer to wait until the fall to give the Fed more time to see how the US economy can handle the delta expansion bypasses.
Leading central banks now own more than £ 18 trillion in government bonds and other assets, up more than 50% from pre-pandemic levels: a staggering expansion after the financial crash more than a decade ago. Since the pandemic began, the Fed’s balance sheet has more than doubled to $ 8 trillion (£ 5.9 trillion). The European Central Bank has total assets of more than 8 trillion euros (6.8 trillion pounds sterling), the Bank of Japan 722 trillion yen (4.8 trillion pounds sterling), while the UK is doubling its QE program to 895 billion pounds sterling Has.
Critics point out that despite the flood of cheap money, the 2008 crisis was followed by more than a decade of meager growth as QE only drove up asset prices, which benefited the owners of stocks and real estate the most. However, the post-2008 recovery has been slowed by governments introducing harmful austerity policies, while central bankers argue that QE helped prevent worse job losses.
The shift in focus to how central banks will reduce their money printing shows how far the global economy has come since the first identified Covid case.
However, it also comes at a sensitive time as the economic recovery from the lockdown wears off, with delta risks and supply chain disruptions hurting growth. While Jackson Hole could mark the beginning of the end of quantitative easing, it is expected that this final act will be extremely lengthy.