QE-stion: when is quantitative easing not quantitative easing?
Answer: when it’s quantitative policy.
Some interesting thoughts on QP from UBS today, saying that the distinction matters (emphasis ours):
QP is essentially about the control of liquidity in the system. Although QP might have real economy implications, it need not. However, QE is explicitly aimed at changing the real economic outcome by seeking to influence expectations. A financial system faced with a liquidity crisis would require QP, but changing the real economy may or may not be an objective that policy makers have. With QE, the policy markers commit to changing the real economy, and to continue with a policy stance until that change is clearly brought about.
Their case in point is Japan circa 2001:
Japan pursued an accommodative policy prior to 2001 which the Bank of Japan was explicit in saying was not quantitative easing. The policy pursued from 2001 onwards was described as quantitative easing. The key difference between the two was that after 2001 (under QE) there was an explicit inflation objective. The Bank of Japan committed to the pursuit of an accommodative quantitative policy until inflation turned positive.
In other words, Japan had the real deal.
So if doing asset purchases is not the sole qualification for QE, is QE2 a misnomer?
Back to UBS and its predictions for how central banks will straddle the balance between QP and QE:
On balance our judgement is that the Bank of England will not engage in further quantitative action, but it is a close call.
And in the case of the Fed:
We believe that the Federal Reserve will formally decide to renew Fed balance sheet expansion (quantitative policy) in the wake of the 2-3 November FOMC meeting. The focus is, we believe, an attempt keep long term interest rates low (which in the case of the US is supportive of growth). However, we are not looking for a “shock and awe” announcement, with a large bond purchase program. Instead, we believe that the Fed will conduct between $35bn and $65bn of purchases on a monthly basis, reviewing this policy on a quarterly basis. The bond market may, therefore, be somewhat disappointed by the scale of the policy when first announced.
Indeed.
Related links:
A QE-easy trillion – FT Alphaville
So QE-easy it hurts – FT Alphaville