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Central banks and the quantitative easing debate – analysis based on the past

By on July 9, 2021 0

Every economically literate reader, even at the middle level, knew this was going to happen, because, well, it happens after every crisis. Yes, the inevitable discussion of central banks and their falsification of quantitative easing of bond purchases that is so delicate it keeps everyone going, is repeating itself. As we get stuck in this loop time and time again, there is no denying the fact that there is a new and unknown fact that emerges every time. Well, looks like that is also the case this time around. Read along to find out.

So, for starters, things aren’t too different this time around either. While supporters continue to view the honor of quantitative easing as a necessary financial policy tool to stabilize the economy during a crisis, opponents continue to blame it for rising income inequality and inflationary pressures. Again, economists around the world have devoted a great deal of time and energy to this debate and while both sides make enough sense, we have yet to declare the winners.

However, the point of this discussion is not to talk about the tilting of the pros and cons of QE, but to analyze another aspect of it, which economists have discovered quite recently. Let me take you one step at a time.

Let’s go back to where it all began. At the start of the pandemic, when the economy needed a big enough boost from the economic downturn, central banks undertook quantitative easing in an attempt to save the drowning global economies. Rich and emerging economies have been equally proactive in the process. Cut off nowadays, inflation is collapsing in the global economy and well, wealthy economies are recovering at a considerably steady rate. While those still battling the virus and active cases are still grappling with the collapsing economy, inflation has been pretty high for them as well. Example: the Indian economy. Nonetheless, a recent report released by JP Morgan Chase found that central banks in rich countries have accumulated asset growth of $ 11.7 trillion, with that figure expected to reach $ 28 trillion in market capitalization by the year. end of the year.

However, what is absurd to economists and readers is the fact that even after economic growth and recovery in wealthy economies, bond buying is still strong on the side of central banks in some countries. Consider, for example, the US economy, which recently created 85,000 jobs in early July, and stimulus-induced consumer demand which is also getting back on track. However, much of the money circulation is absorbed by the Wall Street giants, with the country’s booming real estate market prompting the Federal Bank’s purchase of securities backed by mortgages. Flashbacks to the financial crisis, eh?

For others, however, the potential downsizing process is in talks, with the Bank of Canada slashing its bond buying pace and the Bank of Australia declaring the notion of slowing the pace in the coming months. Some central banks are even reconsidering the quantitative easing plans that had been put in place, such as the Bank of New Zealand, which claimed to revise its $ 70 billion asset purchase target. previously fixed. The boosted economic recovery that has occurred following the early containment of the virus in the country is one of the main reasons for this move. As for others, such as the Bank of England have proposedsed to achieve their goals set before reducing the bond purchase rate.

Well, we’re thinking the exact same thing. The federal bank, so far rather silent, has a lot to do. Even the announcements of plans to hike interest rates have led to a series of currency depreciations for emerging economies, and we don’t even want to recall the tantrum typing of 2013 that sent emerging economies into a whirlwind. Even though the Federal Bank promises to be vocal and transparent in its actions, the record tells us that we cannot be too confident about these claims. Nonetheless, so far the Federal Bank has talked about paying attention to the process and claimed to wait for a well-positioned timing strategy. Pundits expect an announcement by the end of this year, especially with soaring inflation which may not turn out to be as transient as we think, or indeed we hope.

Now, we may want to make some estimates of the eventual process here based on the past, because while we expect central banks to have learned from their mistakes, we need to be careful enough to prepare for it well in advance. .

As a result, one thing worth considering is to what extent long-term bond yields would be affected by the quantitative easing maneuver. Various studies have calculated the effect of QE on long-term Treasuries, the range of which results in a two to three percentage point drop in the value of the yield compared to the current QE being undertaken. by central banks, after adjusting for inflation, i.e. bringing it down to real terms. A constant look at soaring prices today reflects the low interest rate assumption, making the timing of the reduction process even more complicated.

The last line was made in an attempt to create a link between the expectations of market players and the resulting impact on the economy. In the mess of 2013 that created this whirlwind of price drops, it was because of then-President Fred’s decision to reduce the pace of the bank’s asset purchases, allowing investors to buy futures during the time they expected the Fed to raise interest rates overnight. Looks like the discussion about transparency this time around is finally making some sense. But what if that link between asset purchases and interest rates breaks? Economists suggest that this could actually lead to the reversal of quantitative easing without the negative repercussions.

And, both to our surprise and relief, this is in fact a seemingly possible solution, which it seems was adopted by the Federal Bank during the unexpected ups and downs of the market. virus. This makes the reader wonder if there is a legitimately mechanical link between bond yields and quantitative easing, and the answer seems to be a little inclined to negate. “The dot around signaling and intention is a very important feature of how quantitative easing works,” says a trader at a major Wall Street bank. Since the end of March, ten-year Treasury bond yields have fallen, even as spending cuts have intensified.

Edited by Tanish Sachdev