Lex: After zero rates, then what?

What comes after zero rates?, asks Lex. Quantitative easing, perhaps, as used by Japan from 2001 to treat its own deflationary malaise. Strip out the jargon and QE is a relatively simple concept: a switch from focusing on the price of money, that is to say interest rates, to its quantity – ie, the central bank issuing base money (via the “printing press”) to purchase securities – from government bonds to corporate debt, even equities. Unlike interest rates, which cannot go below zero, QE is, in theory, limitless. One sign of QE is the expansion of a central bank’s balance sheet. Indeed, the US Fed’s balance sheet has almost tripled to $2,500bn this year. Pumping out money is, potentially, very inflationary. That is the idea. It is also why the Fed is cagey about QE. Yet such activism, so far absent in Europe, should reassure not scare. When Japan started QE it was too late: deflation had already arrived and so was harder to shake. If QE has now begun in the US, anyone worried about high inflation needs to watch for signals, such as higher lending, that such policies have started to grip. There’s no sign of that anywhere yet.

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