IMF Sees QE Benefits as Ambiguous If Growth Stays Tepid

The benefits of extraordinary policies by the world’s major central banks will become less clear if growth remains tepid because extending them may create new risks, according to International Monetary Fund economists.

While the case for continuing to buy assets and keeping interest rates low is easy to make if growth accelerates or deteriorates, “it is in the intermediate scenario of a sluggish recovery that net benefits of pursuing unconventional monetary policies are more ambiguous,” the fund’s staff wrote in a report released today.

Central banks in the U.S., Europe, Japan and the U.K. attacked the longest and deepest recession since the 1930s with unorthodox accommodation. Now they need to manage the potential costs attached to continuing or exiting these policies, according to the report.

Lasting accommodative policies may encourage risky behaviors by pension funds and insurance companies, the IMF staff said. They may also lower incentives for fiscal consolidation and increase capital flows to other countries, they said.

With evidence that the impact of bond purchases may be waning, central banks may also be tempted to push nominal interest rates below zero or purchase private assets, which would “pose greater implementation challenges and risks,” the IMF said.

Federal Reserve officials are debating how to eventually curtail asset purchases that have swollen its balance sheet to $3.32 trillion. The Federal Open Market Committee on May 1 agreed to keep buying $85 billion in Treasuries and mortgage bonds a month in an effort to bolster economic growth and reduce unemployment that was 7.5 percent last month.

Bumpy Transmission

“The transmission of policy could be bumpy when central banks begin to tighten and shrink their balance sheets,” the IMF staff said. “The potential sharp rise in long-term interest rates could prove difficult to control, and might undermine the recovery -- including through effects on financial stability and investment.”

The IMF report reaches similar conclusions to a paper published by Bank of Canada staff today, which said while there are risks to exiting unconventional policies, that shouldn’t stop policy makers from using them.

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