So Long, QE. I'm Sure We'll See You Again Soon

(Bloomberg Opinion) -- Forecasters have been projecting ever-higher interest rates, especially from the Federal Reserve, whose top officials meet this week. Spare a thought for quantitative easing, the powerful stimulus tool that that played a vital role in buttressing economies and markets early in the pandemic. It struggles to get much of a mention these days. 

Even if massive bond purchases are in retreat, QE is far from routed. If anything, the tool has become legitimate — almost mainstream. Quantitative easing has migrated from the U.S. and Western Europe, where it was deployed in the aftermath of the 2008 crash, to Australia, New Zealand and even in emerging markets such as India, places once horrified at the prospect. Stigma lost, the practice will almost certainly return at some point. (Japan introduced asset purchases long before the global financial crisis and they are still the policy anchor.)  

 The “thanks for coming” note has been lost as investors look to critical Federal Open Market Committee meetings. The FOMC said in December it will hasten the end of QE, wrapping up the current program early this year. Attention has rapidly turned to how many hikes the Fed has in store and when they will begin, with many economists eyeing liftoff in March. Goldman Sachs Group Inc. forecasts four moves this year, with the risk of more.

The prospect of quantitative tightening from the Fed in coming months is also in focus. The Reserve Bank of Australia is likely to at least foreshadow the conclusion of QE next week, if not outright ending it. Canada and New Zealand have wound down. 

Policy makers are careful not to shut the door on future use of QE. The lower the peak in official rates gets each cycle, the more likely that future monetary easing will quickly descend to levels around zero. That leaves authorities with fewer options to stimulate growth: QE is one, as is negative rates, the latter of which remains controversial. 

You could forgive officials for praying for a garden variety downturn next time, something like the recession of 2001. In a Jan. 11 exchange, Pat Toomey, the top Republican on the Senate banking committee, asked Fed Chair Jerome Powell to forswear QE becoming routine. The central bank chief rightly hedged. If the U.S. had a “typical recession,” the Fed would consider cutting rates first, he said. But because rates are likely to remain relatively low, asset purchases would be the next option: “I don’t think we’d automatically use it unless it was necessary.”

Among the virtues of QE is that, in addition to constraining market interest rates, it signals that official interest rates are going to remain low. It packs an even more powerful punch when combined with forward guidance that commits to low rates as much as possible. That was the case after the collapse of Lehman Brothers Holdings Inc. and most of the pandemic. Just because the principle doesn’t apply right now — inflation well exceeds the Fed’s 2% target — doesn't mean the broad lesson loses meaning.

A speech by Gertjan Vlieghe in July, as he was preparing to depart the Bank of England's Monetary Policy Committee, underscored the point. Describing the benefits of QE, especially at the start of a program, Vlieghe said what tends to drive bond yields lower “is not the buying power of QE per se, but speculation about the possibility of lower policy rates in the future.” Vlieghe, a former economist at Brevan Howard Asset Management, went on: “The main and persistent effect of QE has come through lower expected real rates, keeping inflation expectations anchored and lowering expected nominal yields by revealing our reaction.”

QE remains in use, and will be for the foreseeable future, in the euro zone and Japan. The story of monetary policy in the pandemic may not be that dramatic stimulus can work, but that QE is now an acceptable part of the repertoire. Next time, policy makers may well be asked, not so much whether they will deploy QE, but how soon. Those who refrain should be ready to explain why they hesitated.

Dear QE, don’t plan for a long retirement.  

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously he was executive editor of Bloomberg News for global economics, and has led teams in Asia, Europe and North America.

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