It is credited with preventing the worst global recession since at least the second world war from turning into something far worse. But after the injection of trillions of dollars into financial markets to cushion the blow from Covid-19, the era of quantitative easing could be coming to an end.
This week, attention will turn to the gathering of central bank chiefs in Jackson Hole for clues about how the US Federal Reserve plans to bring its vast QE bond-buying programme to an eventual halt after more than a year of emergency stimulus.
Regarded as “Davos for central bankers” since its inception in the 1970s, the annual meeting in the remote Wyoming resort will have a different flavour this year as the pandemic holds back a return to normal.
The Bank of England governor, Andrew Bailey, will not attend, as would be usual, and there will be no Christine Lagarde, the president of the European Central Bank. Due to Covid disruption, the Federal Reserve Bank of Kansas City, organiser of the bash, is holding a smaller event this year, focusing on a domestic list of speakers.
But investors will still watch the meetings closely to gauge the future of global monetary policy, knowing that if the American central bank changes course, the world economy tends to follow.
Early indications came last week after the Fed signalled that it was edging closer to reducing its pandemic-era bond-buying, in a development that rattled global markets. The Fed is buying $120bn (£88bn) a month in US government bonds and mortgage-backed securities to keep longer-term interest rates low and the bond markets functioning smoothly. But most officials now favour cutting back the scale of purchases later this year.
This brings this week’s Jackson Hole speech by the Fed chair, Jerome Powell, into much sharper focus, with investors looking for any stronger hints about the timing and scale for “tapering”, the term used to describe scaling back QE.
Prophecies for the beginning of the end have been made before, however, while the scale of QE has continually been ratcheted up since the 2008 financial crisis, and was pushed into overdrive by the pandemic.
Last month, the House of Lords economic affairs committee warned that the Bank of England was risking becoming “addicted” to creating money and needed to come clean about its exit strategy. Jackson Hole could help turn that tide, though most economists believe the end of QE remains some distance away, and that scaling it back will be a slow and steady process.
In the US, some investors believe Powell will say little of substance this week, preferring to wait till the autumn to give the Fed more time to see how the US economy deals with the spread of the Delta variant.
Leading central banks now own more than £18 trillion in government bonds and other assets, an increase of more than 50% on pre-pandemic levels: this is an eye-watering expansion from the financial crash more than a decade ago. Since the start of the pandemic, the Fed’s balance sheet has more than doubled to $8tn (£5.9tn). The European Central bank has total assets worth more than €8tn (£6.8tn), the Bank of Japan has about 722tn yen (£4.8tn), while the UK has doubled its QE programme to £895bn.
Critics would point out that, despite the flood of cheap money, more than a decade of meagre growth has followed the 2008 crisis, as QE only succeeded in pumping up asset prices – benefiting owners of shares and property most. However, the post-2008 recovery was sapped by governments launching damaging austerity policies, while central bankers argue QE helped avoid worse job losses.
That the focus is shifting to how central banks will scale down their money-printing illustrates just how far the world economy has come since the first identified Covid case.
However, it also comes at a delicate moment as the economic rebound from lockdown fades, with risks from the Delta variant and disruption to supply chains hitting growth. Though Jackson Hole could mark the beginning of the end for quantitative easing, expect this final act to be an extremely lengthy one.
