Could it be Japan all over again? Or Europe? Japan and the BoJ have been at it for nearly three decades and yet the economy and the deflationary forces at work (debt, demographics, globalization and technology inflections) haven’t budged at all. More recently we have seen the same thing in Europe where the ECB has driven most sovereign bond yields into negative territory with their bond buying program (i.e European version of QE) and despite the fact that short term rates remain at 0% both European markets and the Eurozone economy have been on a steep downward spiral.
In the US the Fed expanded it’s balance sheet to more than $4 Trillion with massive injections of liquidity via QE and cut interest rates to effectively 0% and held them there for almost seven years. Even after three years of tightening interest rates are still at a very benign level of less than 3%, and yet the Fed has already seemingly abandoned it’s plans to hike further due to signs that the economy is not ready for rates going any higher.
It should not then come as a surprise that the Fed is already debating the use of QE as a business-as-usual policy tool rather than something reserved only for economic emergencies. As Reuters reported:
U.S. central bankers are currently debating whether it should confine its controversial tool of bond buying to purely emergency situations or if it should turn to that tool more regularly, San Francisco Federal Reserve Bank President Mary Daly said on Friday.
“In the financial crisis, in the aftermath of that when we were trying to help the economy, we engaged in these quantitative easing policies, and an important question is, should those always be in the tool kit — should you always have those at your ready — or should you think about those are only tools you use when you really hit the zero lower bound and you have no other things you can do,” Daly told reporters after a talk at the Bay Area Council Economic Institute.
“You could imagine executing policy with your interest rate as your primary tool and the balance sheet as a secondary tool, but one that you would use more readily,” she added. “That’s not decided yet, but it’s part of what we are discussing now.”