Here’s One Chart That Captures the Debate Over Quantitative EasingBy and
Financial asset gains proved stellar; wages not so much
Markets still face a test: how can they perform without QE
Not all price increases are created equal.
Goldman Sachs Group Inc. raises questions about the success of the efforts by the Federal Reserve and its peers to spark inflation in the wider economy with a chart showing what’s happened with prices in the largest developed economies since the start of 2009.
A replication of their analysis shows a big spread in gains:
While wages would never show swings on par with the likes of high-yield bonds, the chart does illustrate how well financial markets recovered from the 2007 to 2009 meltdowns. By contrast, consumer price inflation, incomes and other such gauges of the “real” economy have put in muted performances. For politicians, the chart sums up the frustrations that have helped propel the populism that Brexiteers and Donald Trump rode to victory.
Few would question that the real economy would have been in much worse shape without the Fed, European Central Bank and Bank of Japan’s determination to avert a financial-industry meltdown last decade, an effort that saw their balance sheets balloon by trillions of dollars.
“We don’t know how effective QE has been because we don’t know what would have happened without it,” said Peter Oppenheimer, chief global equity strategist at Goldman in London. Falling interest rates supported most financial assets, while for the economy “QE has been effective to prevent downside risk,” he said.
Economic growth and wage increases have disappointed in recent years, depressed by poor productivity gains and historically low labor-force participation -- dynamics that lie outside the purview of central banks. Now that monetary policy makers are leaving the onus on governments to address growth, and contemplating the easing off of stimulus, the big question for investors is how resilient markets will be.
For now, optimism prevails - everything from corporate-bond premiums to emerging-market bonds are flashing confidence. It’s perhaps no wonder: though the Fed has ended its QE, continuing programs at the ECB and BOJ are driving almost $200 billion of purchases a month, according to Deutsche Bank AG estimates.
“It should have a big impact on rates and the markets aren’t fully pricing it -- mainly because the Fed hasn’t really talked about” shrinking its balance sheet yet, said Gennadiy Goldberg, an interest-rate strategist at TD Securities in New York. “Once it starts to become part of the Fed statements that this is something it intends to do fairly soon then the markets will start to price it in,” with higher Treasury yields and premiums on mortgage securities, he said.
The Fed “is very mindful of avoiding a knock-on effect to the real economy,” Goldberg said. The U.S. central bank is set to be the first to scale back its balance sheet, with officials signaling that such a discussion is coming. Treasury bonds advanced and the dollar slipped before the Fed’s meeting, seen as all but certain to raise rates. Attention is now directed at the central bank’s path for future moves.
The ECB, for its part, is scheduled to end its bond buying in December.
Japan, where latter-day QE began with a 2001-2006 episode, may be the last to complete its balance-sheet build-up. While the BOJ has shifted its focus toward targeting bond yields and has emphasized the need for government action to strengthen the economy, it has retained quantitative targets.
It was BOJ Governor Haruhiko Kuroda’s predecessor, Masaaki Shirakawa, who concluded in 2008 that Japan’s first QE experiment “was very effective in stabilizing financial markets” though had “limited impact” in remedying economic stagnation -- because banks wouldn’t lend and companies wouldn’t borrow.
Now, “the withdrawal of QE is sending a signal of confidence that central banks have in growth,” Goldman’s Oppenheimer said. “But undoubtedly we’ll get to a stage where rising inflation will push up bond yields to a level that will act as a damper on asset prices” across financial markets, he said.