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European Central Bank, Federal Reserve Prepare Public for Quantitative Easing

More Quantitative Easing (QE) could be coming to the US and Eurozone as soon as the end of the year. The European Central Bank is preparing to cut interest rates and start a new round of bond purchases come Autumn to stymy economic uncertainty amid a global economic slowdown. The Federal Reserve has indicated that it too is considering aggressive asset purchases.

ECB Bank president Mario Draghi has made it clear that all options are on the table for the ECB, which oversees an export-driven European economy that is currently enduring a considerable slowdown due to the German economy’s poor economic indicators, tensions between Brussels and Italy over the latter’s budgetary policy, as well as the threat of a No Deal Brexit.

Draghi made public the ECB’s goal to be more aggressive than the €2.6 trillion bond-buying programs ending December 2018 in order to boost business confidence.

Draghi also noted the need for government action in the form of fiscal expansion by the more powerful members of the Eurozone. While the ECB is not anticipating deflation or recession in 2019, Draghi believes interest rates will likely be lowered.

ECB’s governing council kept the benchmark refinancing deposit rate at zero, while the deposit rate remained at -0.4% and noted that it would give credit at rates of 10 basis points higher than its -0.4% deposit rate.

Recent monetary policy has not produced the bank’s target rate of 2% inflation. In May it was merely 1.2%.
The ECB projects inflation to rise by 1.3% this year, 1.4% next year, and 1.6% in 2021.

Not only is Draghi and ECB considering quantitative easing, but so too is the Federal Reserve. At its two-day Chicago strategy conference, the Federal Reserve made the case for quantitative easing to stave off a recession.

Short-term interest rates are currently 2.25%-2.5%, and the Fed cannot decrease rates by 5 percentage point to stimulate the economy as they did in the past. Money velocity is stuck near all-time lows.

According to Adam Posen, president of the Peterson Institute for International Economics, the Fed is going to use “pretty aggressive, desperate, measures” to stop a new recession.

“If you thought you saw QE before, this is going to be QE squared,” Posen said.

With the Fed having purchased nearly $4 trillion in assets during the Great Recession one decade ago to lower long-term interest rates and stimulate the economy, former Fed governor Randy Krozner said the Fed used the Chicago conference to prepare the public, lawmakers and the markets for aggressive asset purchases, popularly known as quantitative easing.

“The next time policy rates hit the effective lower bound [i.e. zero] — and there will be a next time — it will not be a surprise. We are now well aware of the challenges the ELB presents, and we have the painful experience of the global financial crisis and its aftermath to guide us,” Powell said in a speech opening the conference. “Our obligation to the public we serve is to take those measures now that will put us in the best position deal with our next encounter with the ELB.”

An academic paper prepared for the conference argued the Fed should embark upon more aggressive quantitative easing measures as early as possible when uncertainty arises to stabilize employment.

The Fed could be worried about finding itself in a similar position to the Bank of Japan, whose quantitative easing measures have not boosted the economy there. “They [the Fed] don’t want to be stuck in that kind of situation,” Krozner said about the Bank of Japan, which is failing to create much inflation.

The Fed is aiming for inflation over 2% as economists believe the central bank will lower rates this year in order to stave off a recession.