Fed enters uncharted phase after ending monetary easing on unprecedented scale
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The unprecedented scale of US monetary easing now faces a major turning point.
The Federal Reserve Board this week decided to end on Friday its quantitative easing policy, which injected huge amounts of funds into the market through measures such as purchasing treasury bonds.
After the Lehman shock in autumn 2008, the Fed drew up an exceptional three-phase quantitative easing policy to help overcome a global economic crisis described as “once in a century”. The Fed can, for the moment, be credited with ending the crisis.
Due to its continued purchases of treasury bonds, the Fed’s assets have ballooned to $4.5 trillion, which is equivalent to a quarter of the US economy.
The quantitative easing policy has contributed to the recovery of the US economy, but the measure has left a market constantly filled with huge surplus funds. If nothing changes, the situation could spark a speculative bubble and inflation.
But the fact remains that no central bank of any country has experience in recovering such a colossal amount of funds from the market. The Fed is thus set to enter uncharted territory in terms of monetary policy.
The focus for now will be on when the de facto zero interest rate policy of guiding targeted interest rates of zero to 0.25 per cent will be removed.
Early rate hike denied
In its statement, the Fed said it would maintain the near-zero interest rate for a “considerable time”, a phrase unchanged from its previous statement. This is aimed at denying the possibility of an “early interest rate hike” and avoiding market disturbance.
In May last year, then Fed Chairman Ben Bernanke indicated the possibility of downscaling its quantitative easing, triggering a worldwide drop in stock prices.
It is important for the Fed to gradually diffuse its intentions through the market without giving shocks. The Fed must pursue “dialogue with the market”.
It is worrying that a huge amount of funds have been flowing into emerging economies as a result of the Fed’s quantitative easing policy. If prospects grow strong of a US interest hike all at once, there are fears it will spur the return of capital to the United States.
Efforts must be made to forestall the world economy being shaken by sharp drops in currency values and stock prices in the emerging economies.
We want the Fed to carefully carry out an “exit strategy” of breaking away from its ultra-easy credit policy.
Another destabilising factor for the market is the fact that there is no other country, besides the United States, that is capable of serving as a driving force for the world economy.
Low growth and a deflationary crisis are threatening to expand, especially in Europe, due to a disarray in economic policies. Quick and flexible responses must be urgently made, including fiscal stimulus and greater monetary easing.
Domestic demand in Japan has been weakening, centering on private consumption. It is more important to expedite further a growth strategy aimed at invigorating private firms.
