What happens when $2 trillion is sucked out of the global economy? QT
Central banks have been credited with averting a global depression twice over the past 15 years: Once after the 2008 financial crisis, and again at the height of the coronavirus pandemic.
But the tactics they deployed to restore confidence and keep money flowing from banks to the economy amounted to a high-stakes experiment — one that may be impossible to unwind without destabilizing the financial system.
Central banks purchased tens of trillions of dollars worth of government bonds and other assets in a bid to bring down longer-term borrowing costs and stimulate their economies. This measure, known as “quantitative easing,” or QE, created a flood of cheap cash and gave policymakers newfound sway over markets.
“There are concerns we are in uncharted territory,” said Raghuram Rajan, the former governor of the Reserve Bank of India, who presented a paper on these risks at last year’s gathering of central bankers in Jackson Hole, Wyoming. He noted that “unintended consequences” were likely as QT continued.A mere indication from the Fed that it intended to reduce the pace of its asset purchases in 2013 led to the so-called “taper tantrum,” with investors dumping US government bonds and stocks.
And when the central bank tried QT, shrinking the size of its balance sheet between 2017 and 2019, trouble soon followed in some markets. In September 2019, for example, the US overnight lending market — which banks use to quickly and cheaply borrow money for short periods — seized up unexpectedly. The Fed had to intervene with an emergency infusion of liquidity.
Julia Horowitz CNN Fri May 19, 2023
https://edition.cnn.com/2023/05/19/economy/quantitative-tightening-global-impact/index.html
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