A Look Back At 8 Years Of QE

Well, we’re coming to the end of an era.

The median Fed dots now presage three hikes in 2017 and Deutsche Bank’s models now incorporate the rolling off of the FOMCs assets and under once scenario, even the gradual liquidation of the SOMA portfolio.

Meanwhile, the ECB has signaled its willingness to at least start the “taper” discussion despite the fact that a sustainable rise in inflation remains elusive. Japan is, as always, another story and indeed one could interpret the BoJ’s pledge to keep 10Y yields anchored at 0% as a kind of blank check promise with no theoretical upper limit (as SocGen’s Albert Edwards put it, “on reflection though … the BoJ had effectively written the government a blank cheque for any fiscal expansion it wants, with the promise that yields would remain around zero. That might require Y80tr pa, or Y180tr, or indeed infinity! ).

Still, one can’t shake the feeling that even if the whole endeavor turns into a kind of “failure to launch” and eventually ends up round-tripping into QE4, we’ll soon see some attempt to exit QE for good (i.e. to pare down what’s held on the books) on the part of the Fed, an exercise which will likely be mimicked by the ECB albeit with an “appropriate” delay.

Given that it seems we are closer to QE’s “twilight years” than we are to its glory days I thought it worth looking back on the greatest (or “worst”, depending on how you look at it) experiment in the history of monetary policy. Here’s Barclays:

Figure 3 shows that the medicine prescribed by policy makers in response to the 2008 credit crisis has varied quite significantly across the globe and over time.

US: The Fed initially aggressively cut rates and introduced an alphabet soup of liquidity facilities to alleviate the liquidity crunch facing the financial system. President Obama did one round of fiscal stimulus in 2009-10. The Fed then followed up with a series of quantitative easing (QE) programs, which expanded the Fed balance sheet by ~$2.5 trillion. After tapering in 2013, the Fed is now in a clear tightening mode.

Europe: After cutting rates to zero, the ECB first cut the overnight deposit rates to negative in 2014, which caused a significant weakening of the euro. This was followed by QE in 2015, which was supposed to last until March 2017. In December 2016, the program duration was extended but the pace reduced back to €60bn/month from €80bn/month. The ECB emphasized that this reduction should not be interpreted as the start of a systematic reduction (tapering) and that it can scale up the size and duration if needed, which makes QE essentially open ended.

Japan: Japan also started with a fiscal stimulus package in 2009. The BOJ launched its QE program in 2012, which led to substantial yen depreciation. This was coupled with moderate stimulus. The BOJ cut rates to negative in 2016, and shifted to directly targeting the level of longer term rates and the yield curve later in the year.

China: China responded to the credit crises with a strong fiscal stimulus package in 2009. It then raised rates only to cut them again in 2015. A fresh bout of fiscal stimulus was initiated in 2016, and the CNY was allowed to depreciate against the dollar.

As for the efficacy of these policies, we can probably say the same thing that President Obama said on Friday about Washington’s foreign policy in Syria: “We can’t say it’s been a success.”