Tyndall Monthly Commentary: Addicted to Quantitative Easing

As part of a determined response to the Savings and Loans Crisis of 1989, the US Federal Reserve launched at that time what we would nowadays describe as a Quantitative Easing Policy (QEP).  Perhaps positively, this policy was relatively successful in boosting the economy in the early 1990s; then, as the economy began to recover, the then FRB Chairman Greenspan decided to end the de facto QEP with a surprise modest rise in interest rates.  Over the next nine months, global bond markets were to suffer their worst-ever bear market, emerging market equities fell heavily and global growth slowed until Greenspan was forced into relenting by the Tequila Crisis in Mexico and the FRB returned to an easier monetary stance. 

The Federal Reserve’s next attempt at tightening – in early 1997 – then contributed to the Asian Financial Crisis and this once again forced a quick about-turn by the ever pro-growth Mr Greenspan.  The Fed’s next attempt at a more restrictive stance occurred in 2000, but the NASDAQ Bubble that had formed in the meantime promptly burst and this event, together with the events of September 11, led to a new period of FRB accommodation that boosted asset prices but which finally seemed to be ending under the influence of higher inflation rates in early 2007. However, the Global Financial Crisis promptly occurred as policy tightened and this quickly forced the Federal Reserve into launching what became the official QEP Regime of 2009.  

The FRB then attempted an exit from QE1 in 2010 by indicating that it was considering selling some of the debt securities that it had recently purchased and even raising interest rates, but this effort had to be aborted as the financial markets weakened sharply.  Indeed, far from tightening as they had intended, the FRB was soon obliged to enact QEP Mark 2 and this propelled financial markets even higher until the FRB announced that it was going to try to stop buying further bonds. There was no mention of higher interest rates or actual bond sales by the FRB when it reached the end of QE2 but the financial markets nevertheless weakened until QE3 was introduced in the second half of last year.  The markets’ addiction to QE seems to have been strengthening.