Markets brace for the great QE unwind
Quantitative easing has been the defining monetary policy innovation of the 21st century. With global economic recovery now seemingly robust, the challenge facing policymakers is to reverse this stimulus. This is likely to be fraught with danger, particularly in Europe.
Mervyn King, the former governor of the Bank of England, once said that the central banks should aspire to dullness because, “boring is best”. When he made these remarks at the turn of the century, he could not have anticipated the way central banking would evolve. The US Federal Reserve now has a larger balance sheet than the combined market capitalization of the world’s 10 biggest companies.
Boring is so last century.
Central banks have always been big economic actors, setting short-term interest rates and occasionally intervening to manage their currencies. But they have left the pricing of almost everything else to the invisible hand of the market. No more. Quantitative easing, a heterodox monetary policy tool pioneered by the Bank of Japan in 2001, is the new normal. Central bankers, not superstar hedgies, secretive sovereign wealth funds or pension managers, are the biggest beasts in bond markets.
Since the collapse of Lehman Brothers in 2008, central banks have bought $14.2 trillion of financial assets, mostly sovereign bonds. In 2017, $1 trillion (and counting) has been added to central bank balance sheets. But, despite this being the biggest and fastest accumulation of assets since the onset of the financial crisis, markets are already looking toward a post-QE world.