Since the Fed announced its program of quantitative easing (QE) in November 2008 under Ben Bernanke, there have been concerns about how the eventual withdrawal will play out.
Last night John Williams, preisndet of the San Francisco Fed said that the Fed may "reduce somewhat the pace of our securities purchases, perhaps as early as this summer," if the US jobs market "considerably" improves. Our banking reporter Tim Wallace writes on the impacts of loose monetary policy:
The economy’s rebalancing can be undermined, inflation may be hard to get back under control, and the eventual raising of interest rates will become tougher and more dangerous, according to Jamie Caruana from the Bank of International Settlements (BIS).
“Prolonged monetary accommodation gives borrowers, financial institutions and policymakers an incentive to keep kicking the can down the road, delaying necessary repair and reform,” said Caruana.
And it “can produce other side effects. Monetary stimulus may find its way into asset prices and leverage before influencing goods and services price inflation. Moreover, prolonged very low rates can distort market signals.”
We could now face this painful exit phase, as concerns mount that ongoing QE will see its distortionary effects continue to work through the markets while its returns diminish.
Yet markets seem convinced that these measures won't come to an end any time soon as volatility indexes imply some smoothness. Saxobank's Steen Jakobsen warns that QE is helping our elites, not our economy:
But today, while the stock market is clearly on an upward trajectory, not everyone is benefiting from the rise. Stock ownership almost exclusively centres on the top 10 per cent of the population, and the social divide is much higher than before the crisis. Further, 85 per cent of jobs and growth come from small and medium-sized enterprises (SMEs) – meaning that while the top 15 per cent of listed stocks are benefiting from the equity market boom, growth-driving SMEs are not. Global monetary policy is boosting the largest beasts in the corporate world and the richest 10 per cent who own stock. The Fed and the Bank of Japan may talk about the wealth effect, but what they really mean is the elite effect. Their premise is flawed.