What are the macroeconomic effects of asset purchases?
Martin Weale, Tomasz Wieladek 10 June 2014
After reducing their policy rates close to zero in response to the global financial crisis, the Bank of England and the Federal Reserve began purchasing assets. This column assesses the effect of these asset purchases on output and inflation. In line with previous studies, the authors find that asset purchase announcements are associated with increases in both output and inflation in both countries. They also find that quantitative easing had a larger impact on UK inflation, which suggests that the UK Phillips curve is steeper.
After policy rates fell close to zero in response to the global financial crisis of 2008-09, the scope for further conventional monetary policy easing was exhausted. As a result, both the Bank of England and the Federal Reserve embarked on large-scale asset purchases of government and financial securities (see Figures 1 and 2).
inflation, Federal Reserve, Phillips curve, Bank of England, quantitative easing, unconventional monetary policy, output
The transmission of Federal Reserve tapering news to emerging financial markets
Joshua Aizenman, Mahir Binici, Michael M Hutchison 04 April 2014
In 2013, policymakers began discussing when and how to ‘taper’ the Federal Reserve’s quantitative easing policy. This column presents evidence on the effect of Fed officials’ public statements on emerging-market financial conditions. Statements by Chairman Bernanke had a large effect on asset prices, whereas the market largely ignored statements by Fed Presidents. Emerging markets with stronger fundamentals experienced larger stock-market declines, larger increases in credit default swap spreads, and larger currency depreciations than countries with weaker fundamentals.
The quantitative easing (QE) policies of the US Federal Reserve in the years following the crisis of 2008–2009 included monthly securities purchases of long-term Treasury bonds and mortgage-backed securities totalling $85 billion in 2013. The cumulative outcome of these policies has been an unprecedented increase of the monetary base, mitigating the deflationary pressure of the crisis.
Exchange rates International finance Monetary policy
exchange rates, Federal Reserve, asset prices, emerging markets, stock markets, Credit Default Swaps, tapering
Turmoil in emerging markets: What’s missing from the story?
Kristin Forbes 05 February 2014
The Federal Reserve’s ‘taper talk’ in spring 2013 has been blamed for outflows of capital from emerging markets. This column argues that global growth prospects and uncertainty are more important drivers of emerging-market capital flows than US monetary policy. Although crises can affect very different countries simultaneously, over time investors begin to discriminate between countries according to their fundamentals. Domestic investors play an increasingly important – and potentially stabilising – role. During a financial crisis, ‘retrenchment’ by domestic investors can offset foreign investors’ withdrawals of capital.
Emerging markets are going through another period of volatility – and the most popular boogeyman is the US Federal Reserve.
The basic storyline is that less accommodative US monetary policy has caused foreign investors to withdraw capital from emerging markets, causing currency depreciations, equity declines, and increased borrowing costs. In many cases, these adjustments will slow growth and increase the risk of some type of crisis.
Federal Reserve, capital flows, emerging markets, global financial crisis, tapering
Unconventional monetary policy normalisation and emerging-market capital flows
Andrew Burns, Mizuho Kida, Jamus Lim, Sanket Mohapatra, Marc Stocker 21 January 2014
The Federal Reserve has begun to ‘taper’ its programme of quantitative easing. The ‘taper tantrum’ that followed the announcement of tapering in May 2013 suggests that the normalisation of rich countries’ unconventional monetary policies may lead to capital outflows and currency depreciations in emerging markets. This column presents the results of recent World Bank research into these effects. In the baseline scenario, the unwinding of QE is predicted to reduce capital inflows by about 10%, or 0.6% of developing-country GDP by 2016. However, if markets react abruptly, capital flows could decline by as much as 80% for several months.
Quantitative easing (QE), which started in 2008, swelled the Federal Reserve’s balance sheet to an unprecedented $3.4 trillion. In May 2013, the Fed announced that it would evaluate the possibility of a reversal of its unconventional monetary policies – QE in particular .
The event, which has come to be known as ‘tapering’, prompted a sharp, negative response from financial markets (the so-called ‘taper tantrum’):
Financial markets International finance Monetary policy
Federal Reserve, quantitative easing, unconventional monetary policy, tapering
Tapering talk: The impact of expectations of reduced Federal Reserve security purchases on emerging markets
Barry Eichengreen, Poonam Gupta 19 December 2013
Fed tapering has started. A revival of last summer’s emerging economy turmoil is a real concern. This column discusses new research into who was hit and why by the June 2013 taper-talk shock. Those hit hardest had relatively large and liquid financial markets, and had allowed large rises in their currency values and their trade deficits. Good macro fundamentals did not provide much insulation, nor did capital controls. The best insulation came from macroprudential policies that limited exchange rate appreciation and trade deficit widening in response to foreign capital inflows.
In May 2013, Federal Reserve officials first began to talk of the possibility of the US central bank tapering its securities purchases from $85 billion a month to something lower. A milestone to which many observers point is 22 May 2013, when Chairman Bernanke raised the possibility of tapering in his testimony to Congress. This ‘tapering talk’ had a sharp negative impact on economic and financial conditions in emerging markets.
Three aspects of that impact are noteworthy:
Exchange rates Monetary policy
exchange rates, monetary policy, Federal Reserve, emerging markets, capital controls, Macroprudential policies, Capital inflows, currency war, tapering
Dark side of housing-price appreciation
Indraneel Chakraborty, Itay Goldstein, Andrew MacKinlay 25 November 2013
Higher asset prices increase the value of firms’ collateral, strengthen banks’ balance sheets, and increase households’ wealth. These considerations perhaps motivated the Federal Reserve’s intervention to support the housing market. However, higher housing prices may also lead banks to reallocate their portfolios from commercial and industrial loans to real-estate loans. This column presents the first evidence on this crowding-out effect. When housing prices increase, banks on average reduce commercial lending and increase interest rates, leading related firms to cut back on investment.
Policymakers around the world often worry about decreases in real-estate prices and other asset prices, and take measures to prevent them. For example, in the aftermath of the financial crisis, the Federal Reserve has engaged in large-scale asset purchases – especially of mortgage-backed assets – to support the housing market and, in turn, the overall economy.
Financial markets Monetary policy
housing, Federal Reserve, investment, asset prices, banks, lending, real estate
Forward policy guidance at the Federal Reserve
John C. Williams 16 October 2013
The Federal Open Market Committee has used various forms of forward guidance to influence the views of businesses, investors and households about where monetary policy is likely to be headed. This column by the President of the San Francisco Fed presents his views on the benefits, limitations and future role of forward policy guidance.
In response to the financial crisis, the Federal Open Market Committee (FOMC) lowered the target federal funds rate to essentially zero in December 2008, where it has remained. The economy, however, was still reeling, and it wasn’t possible to create additional monetary stimulus by cutting the federal funds rate further—owing to the inability of nominal interest rates to fall much below that point.
Federal Reserve, forward guidance
Unwinding quantitative easing
Stephen Grenville 22 June 2013
Chairman Bernanke’s hints about the end of quantitative easing (QE) have produced volatility in financial markets. This column argues that financial markets were startled because an end to QE is likely to cause capital losses for bond holders since term premium is substantially negative. Bank regulators should be alert to the possibility. This fundamental explanation is teamed with widespread confusion among market participants about how quantitative easing actually works.
Fed Chairman Ben Bernanke’s prepared statement on 22 May was the epitome of even-handed non-committal drafting (Federal Reserve 2013b) but the mention of "stepping down" and "in the next few meetings" in the discussion sent a shiver through financial markets worldwide. Bond yields jumped just about everywhere; the Abenomics euphoria in Japan deflated; and capital flows to emerging markets reversed direction. Bernanke was just pointing out the obvious and he went on to say that “we could either raise or lower our pace of purchases going forward”. Why were financial markets so startled?
Global crisis International finance
Federal Reserve, Bernanke, QE
Is the Federal Reserve breeding the next financial crisis?
Ambrogio Cesa-Bianchi, Alessandro Rebucci 11 April 2013
Many economists think that the US Federal Reserve’s loose monetary stance in the 2000s fuelled the US housing bubble. Is the Fed thus responsible for the Global Crisis? This column discusses evidence suggesting that monetary policy was, in fact, not to blame. Rather, it was the absence of an effective regulatory function that created the mess we’re in now. It is not fair to blame the Great Recession only on the Fed’s monetary-policy stance nor is the Fed now breeding the next US financial crisis.
According to many economists, monetary policy played a central role in exacerbating the severity of the global financial crisis of 2007-09. For example, Taylor (2007) pointed out that, during the 2002-06 period, the US federal funds rate was well below what a standard ‘Taylor rule’ (a tool routinely used by economists to summarise past central bank behaviour) would have predicted (Figure 1). Indeed, the interest rate implied by the Taylor rule (dashed line) was well above the actual federal funds rate (solid line) as of the second quarter of 2002.
Federal Reserve, financial crisis
The influence of the Taylor rule on US monetary policy
Pelin Ilbas, Øistein Røisland, Tommy Sveen 13 February 2013
Economists everywhere recognise the Taylor rule’s importance in monetary policymakers’ decisions. But exactly how important is it? This column aims to analyse the Taylor rule’s influence on US monetary policy by estimating the policy preferences of the Fed. There is a high degree of reluctance to let the interest rate deviate from the Taylor rule and, contrary to the literature and current policy debates, it seems large deviations from the Taylor rule between 2001 and 2006 were in fact due to negative demand-side shocks. During this period, there is in fact no evidence to support the notion of a decreased weight on the Taylor rule.
The Taylor rule has undoubtedly influenced the debate about monetary policy over the last 20 years. But has it directly influenced monetary policy? According to a survey by Kahn (2012), the answer seems to be that it has. The transcripts from the Federal Open Market Committee meetings include several references to the rule.
US, Fed, Federal Reserve, Taylor rule