The history and future of QE
Speech given by
Ben Broadbent, Deputy Governor Monetary Policy
Society of Professional Economists, London
23 July 2018
I have benefitted from helpful comments from my colleagues at the Bank of England. I would
particularly like to thank Mette E. Nielsen for valuable research assistance. The views expressed are
my own and do not necessarily reflect those of the Bank of England or other members of the Monetary
Policy Committee.
Hello, and thank you for inviting me today.
In 2002, the University of Chicago held a 90th birthday party for the great American economist
Milton Friedman. One important guest was Anna Schwartz, who four decades earlier had co-written with
Friedman the landmark book A Monetary History of the United States.
It's possible that, even among those of you prepared to give up a pleasant July evening to come to a talk by
tome entitled "A monetary history of [anywhere]" won't have found its
a central bank official, an 800-page
way to the very top of your holiday reading list.
But it's actually a gripping read, especially the chapter about the Great
Depression. It also has a claim as
The book pioneered a new "narrative" approach
the most influential piece of economic history ever written.
-
to identifying independent changes in monetary policy the idea being that, to separate these from the more
automatic ("endogenous") reactions of
policymakers to the economy you needed to scour the historic record
and understand how their decisions were actually taken.1
It changed economists' perceptions of the role of monetary forces, including monetary policy, in economic
fluctuations. For example, it helped to establish the view that the effects of monetary policy on real variables
- -
real national income or its distribution, for example are in the long run negligibly small. You cannot
permanently enrich a country, or raise real wages, simply by easing monetary policy and engineering some
inflation.
Equally, the book argued that policy can have very powerful effects at shorter, cyclical horizons. In
particular, it claimed that the Great Depression could have been averted had the US Federal Reserve not
over-tightened policy in the late 1920s and if had it acted more precipitously to loosen it once the downturn
began. The appropriate measures would have included an earlier abandonment of the gold standard. They
would also have involved purchases", designed to contain the rise in
"large-scale open-market private-sector
-
bond yields and supply reserves to the banking system. We have a new name for this we now call it
"Quantitative Easing" -
but the policy itself is not new.
The book therefore had a profound influence on monetary policy makers everywhere, but especially those in
One other guest at Friedman's birthday party, himself an expert on the Great Depression,
the United States.
"I first read
was the then Fed Governor Ben Bernanke. Paying tribute, he said this2: A Monetary History of
the United States early in my graduate school years at M.I.T. I was hooked, and I have been a student of
economic history ever since...
monetary economics and I would like to say to Milton and Anna: Regarding
We're very But thanks to you, we won't do it
the Great Depression. You're right, we did it. sorry. again".
1
See also Romer and Romer (1989).
2
Bernanke (2002).
Only a few years later, as Fed Chair, he was compelled to put his words into action. Nor was it just the Fed
who responded in this way. One after the other, in the aftermath of the financial crisis, central banks in
developed countries slashed interest rates, extended collateralised loans to banks and purchased significant
quantities of government bonds, expanding their balance sheets many times over.
Today I want to take a brief look at what QE has done. I also want to add some colour to what the MPC has
recently said about its approach to unwinding the policy, drawing in part on the experience of the US Fed.
What did QE do?
didn't document 100 years of the past for the sake of
Despite the title of the book, Friedman and Schwartz
historical interest alone. They wanted to understand the effects of monetary policy.
can't do
Getting at these is harder than you might think, because empirical economists experiments. In a
- -
laboratory, a scientist interested in the effects of one thing on another call them X and Y can usually do
"control" for - -
two important things. He or she can in other words hold constant everything else that might
It's also possible3
also affect Y. This allows one to isolate the study purely to what X does. to move the
"independent variable" X around at will, observing directly what it does to the "dependent variable"
Y.
Empirical economists can't do either of
these things. Changes in policy are one of only many influences on
the economy and it's not as if we can just switch these other things
off. The best we can do is use large
samples of data, coupled with various statistical methods, in an effort to even them out. And even if we
could somehow freeze the rest of the world it would never be possible (or morally justifiable) then to
The economy isn't a lab
experiment on it by arbitrarily putting up interest rates. rat. What instead tends to
And it's this
happen, in the real world, is that policy reacts to events at least as much as it causes them.
relationship - from the economy to policy, rather than the other way around - that dominates the data.4
study - the "narrative" method -
Friedman and Schwartz's was an effort to identify the rare occasions when
this was not the case. They were trying to uncover natural experiments.5
3
Scientists don't always have this luxury. In drug trials, for example, doctors cannot control for every other influence on health. In
they can't control for
judging the impact of lifestyle choices, doctors are in the same position as econometricians: other influences, nor
can they independently change the "X" variable -
(which is why care is needed in interpreting such studies see e.g. Ioannidis (2013)).
4
For example, interest rates tend to go up when the economy is strong, and inflationary pressure is growing, and down when
it's weak.
But one shouldn't conclude from this correlation that low interest rates cause weak growth. In fact, the effects run the other way: it's
precisely when the economy is weak that you need the support of easier monetary policy (as my colleague Jan Vlieghe put it more
succinctly, "umbrellas don't cause rain" (Vlieghe (2016a)).
5
the "natural experiment" was the conflict between the New York Fed, which argued
In the particular case of the Great Depression,
continually for easier policy, and other banks in the Federal Reserve System, including the Board in Washington, that were opposed to
it. It was the others - the reserve banks of the "interior" - that won. The British economist Roy Harrod, in his review of A Monetary
History
in 1964, relayed an anecdote that shed some light on those arguments. It also made plain that QE was under active
"The authors hold that, if the New York Bank could have retained the position of leadership
consideration at the time, at least by some:
that it had in the preceding period, all might have been managed much better, and special praise is given to its two experts, Carl Snyder
and Randolph Burgess. Perhaps this reviewer may be forgiven for yielding to the strong temptation to introduce a personal note at this
point. I had luncheon with Mr Snyder and Mr Burgess in the Federal Reserve Bank of New York in the late summer of 1930. I came
briefed with statistics and arguments... With the utmost of my youthful powers I pleaded with them that they should purchase $1 billion
worth of US government securities right away. I argued that, if they did not do this, the US economy would infallibly sink down to lower
levels, and that the great slump, which was then proceeding throughout the world, would assume unmanageable dimensions and cause
accepted my figure of $1 billion...
wide-spread havoc and political disturbance. I do not recall if those two experts But on the general
If these challenges exist for conventional monetary policy they surely apply at least as much to QE. Our
experience is more limited, the data sample therefore smaller. And the policy was very clearly a response to
other events, in this case the powerful contractionary forces unleashed by the banking crisis. This has hardly
been a randomised trial.
So you cannot conclude from the fact of the recession of 2008-09, or the weak growth that followed, that QE
was of no help. Alarmingly, things might have been that much worse without it. They certainly were in the
Great Depression. Within three years of the Wall Street crash, the yield on US corporate bonds had risen to
over 11%, even as the economy was collapsing; thousands of US banks failed, taking a third of deposits
with them; industrial production halved and unemployment rose by over 20% points (Charts 1a-d compare
with the UK's experience in the last
these things crisis, with the dashed vertical line drawn at the date of the
inception of QE).
Equally, there were many other differences between the last financial crisis and the Great Depression, so we
can't on the face of
it give QE all the credit for having avoided that fate. There was no deposit insurance
during the early 1930s, something that surely contributed to the widespread runs on banks and their
subsequent failure. In 2008-09, as well as conducting QE, central banks cut interest rates close to zero and
engaged in direct collateralised lending to the banking system. Governments also provided support to the
banking system, via equity bailouts and lending schemes of their own. They also eased fiscal policy more
aggressively and managed to avoid the protectionist measures that had exacerbated the Great Depression.
To a greater or lesser extent all these things must have helped.
their "narrative"
So what can we say about the specific contribution of QE? We may not be able to employ
method, nor is our experience of QE as extensive as for more conventional monetary policy. But we do have
some advantages over Friedman and Schwartz. We have more data than they did, including a lot of
high-frequency information on the behaviour of financial markets. This allows us to see the reaction of asset
prices to QE announcements over short periods of time, cutting down on extraneous influences. We also
have more advanced statistical techniques, helping to refine the estimates of the effects on economic
activity.
I won't go into all this work in
any great detail. (For that you can read a very good and comprehensive
survey by Andy Haldane and other Bank economists,6 and the references therein.) Let me just try and
summarise what it says:
Charts 1a-d: Things might have been worse
issue I found that they were in complete agreement with me. They spoke very frankly about the shift of power within the System. They
earnestly wanted to pursue a policy of this kind, but could not do so without persuading the Banks of the "interior" and they had so far
to persuade them." (Harrod
been unable (1964)).
6
Haldane et al (2016).
Chart 1.a: Corporate bond yields Chart 1.b: Deposits
Chart 1.c: Industrial production Chart 1.d: Unemployment
Sources: Bank of England; ICE BoAML; National Bureau of Economic Research and Board of Governors of the Federal Reserve
System, retrieved from FRED, Federal Reserve Bank of St Louis; ONS; and Bank calculations.
Stalks indicate March 2009. For Chart 1b, US data on deposits are seasonally adjusted while UK data are not.
First, and all else equal, asset purchases do seem to have had a significant impact on economic activity.
Some studies get at that effect using existing estimates of the sensitivity of GDP to bond yields and
combining those with the impact of QE announcements on those yields. Others estimate the impact on bond
markets and activity jointly.
There is some suggestion in Haldane et al (2016) that the early phases of asset purchases had more
powerful effects, and it's clear that
the biggest daily moves in bond yields occurred after the very first QE
announcements in early 2009 (Chart 27). But on average, and whichever method one uses, there does
7
The impact of subsequent rounds was bound to be smaller on the day because markets had come to expect them in advance. Even
allowing for that however - Chart 2 plots moves in gilt yields against the surprise in asset purchases, derived from survey measures at
-
the time the early-2009 moves still look a bit larger than the others. Note that the impact of the asset purchases in August 2016
("QE4") is drawn as a spread rather than a dot. That's because the MPC purchased corporate as well as government debt. If
you view
the two as reasonably close substitutes, you should count the combined purchases as the size of the decision, not just those of gilts
(£70bn versus £60bn). The same issue arises later when considering the impact of QE in the United States.
seem to have been a significant effect on demand. The central estimate in Weale and Wieladek (2016), for
example, is that purchases worth 1% of GDP boost UK GDP by around 0.25%.
Second, if the effect on long-term bond yields is clear, the impact on share prices is harder to detect. On
-
some days after QE announcements equity prices went up the largest rise happened to be after the
-
extension of asset purchases in October 2011, when gilt yields actually went up but on others they fell.
That doesn't prove there was no
impact. By their nature, prices of risky assets are more volatile. Such was
the flow of negative news about the economy and corporate profits in 2009, even from day to day, that equity
markets often weakened even as bond markets strengthened.
Chart 2: QE1 had the largest impact on yields Chart 3: The impact on share prices is harder to
detect
Sources: Bloomberg Finance L.P., Tradeweb, Reuters Poll, and Sources: Thomson Reuters Datastream, Reuters Poll, and Bank
Bank calculations. The reaction is for 5-25 year gilts. The chart is calculations. The share price reaction is for UK-focused equities.
based on figure 10 in Haldane et al (2016).
- -
But it should be borne in mind when reading as one often does that QE has done little except boosted
prices of assets like shares and houses, or even led to a "boom" or "bubble" in those markets. It's also worth
looking at Charts 4 and 5. Chart 4 plots average annual growth of UK house prices over rolling 10-year
That's less than household income growth over the It's also
periods. The latest figure is 2%. past decade.
close to lowest rate of growth over any ten-year period since the period following the Second World War. The
peak rate of 18% a year was during the 1970s.
It's therefore
The general level of inflation was also very high at that time: every price was going up rapidly.
more informative to look at asset prices in real terms (i.e. relative to consumer prices). The level of real
house prices is plotted in blue in Chart 5. As you can see, they went up extremely rapidly between 1996 and
2004. But the latest figure is barely any higher than it was in the middle of the last decade. As for shares,
real equity prices of UK-facing companies (in red) are still 30% lower than immediately before the financial
crisis (and almost as far below the earlier peak in the late 1990s).
House prices haven't risen much over
Chart 4: Chart 5: Real equity prices well below pre-crisis
the past 10 years levels
Sources: Nationwide and Bank calculations. Sources: Nationwide, ONS, Thomson Reuters Datastream, and
Bank calculations.
Chart 6: Real equity prices and de-trended GDP
As I say, we can't conclude from all this that QE
had no impact at all on these prices, even at the
margin. Given its effects on longer-term interest
rates, and on economic activity, it probably did.
But their apparent lack of response does at least
demonstrate that the policy had quite a bit to fight
against. To the extent there was such an effect, it
would be more accurate to say QE helped to
prevent these prices from falling further, rather
than that it fuelled any sort of
"boom".
Sources: ONS, Thomson Reuters Datastream, and Bank
You can tell the same story about QE and the
calculations. Output de-trended using a HP filter.
wider economy. All else equal, the policy
supported demand, activity and employment. But that support was being provided in the face of significant
contractionary forces, arising from both the first phase of the financial crisis and then its unwelcome
offspring, the euro area crisis of 2010-12. You can see from Chart 6 that it wasn't until confidence in the
single currency was restored in mid-20128, and a more sustained economic recovery began in the UK (the
green line is de-trended GDP9), that these asset prices also recovered.10
8
I've argued before that one of the critical precursors to that recovery was Mario Draghi's pledge in the summer of 2012, supported
soon after by political leaders in the euro area, to "do whatever it takes" to preserve the integrity of the single currency.
In conjunction
with our own Funding for Lending Scheme, this led to a sharp fall in funding costs, particularly for banks, and soon after a resumption in
the supply of credit to the domestic economy (Broadbent (2014)).
9
GDP) and, because potential output growth is also stochastic, it won't
The green line is purely a statistical construct (HP-filtered
necessarily be the same as the "output gap". In particular, the decline in the past few years is likely to reflect slower growth of supply
rather than a rise in the degree of spare capacity.
10
criticism of QE is that, because it pushed up prices of assets, it also increased inequality. But real asset prices haven't
A related gone
up over the past decade, as we've seen, nor has inequality, either of wealth or of income. Furthermore, even though QE
probably
raised asset prices at the margin (all else equal), the effect on inequality was offset by the support to real activity and employment.
Why the impact of QE might be changeable
Estimates of how QE has affected the economy often assume the effect is invariant: so many pounds of QE
means such-and-such an impact on GDP, no matter what else is going on. Yet our experience so far
suggests the effect may not be fixed. In particular, it seems to have been larger when QE was first launched
that can only be a tentative conclusion from the UK experience what's
than in subsequent rounds. If
happened more recently in the US is surely more striking.
As you know, the Fed has now started
Chart 7: US QT has done little to US bond yields
to reduce its asset holdings: it has
embarked on what you might call "QT"
(T for tightening).
Given the sizeable impact of QE1,
including in the US, you might have
expected this to result in a material rise
in bond yields, especially at a time
when the US government is also
starting to sell more debt. The first
column in Chart 7 gives you some idea
of the predicted effect on this basis. It
Sources: Bloomberg Finance L.P, BEA, Federal Reserve Bank of New York
(2017), academic studies and Bank calculations. See footnotes 11 and 12 for
takes the median projection for the
further details.
decline in the size of its balance sheet over the next three years (as calculated by the New York Fed). It then
multiplies that by the estimated response of Treasury yields, per dollar of purchases, in the first phase of
QE.11
In the event, things have turned out rather differently. Despite the various QT announcements in the first
nine months of last year (and despite rising short rates and easier fiscal policy) yields actually fell over that
period (the right-hand bar). That, of course, might be due to any number of other influences. But even if you
focus on the particular points at which the policy was communicated12 (the middle bar) there was essentially
no reaction in the government bond market.
That's because cyclical rises in unemployment, which would have been much larger in the absence of QE, are larger at
the lower end of
the wage distribution. Taking both into account, the central estimates in a recent study by Bank economists are that QE itself actually
had essentially zero (actually marginally negative) net impacts on the inequality of wealth and income (Bunn, Pugh and Yeates (2018)).
I include some exhibits illustrating these points at the back of this talk. See also Broadbent (2016) and Carney (2016). Economists at
the ECB and Princeton University recently reached a similar conclusion (Ampudia et al (2018)).
11
The balance sheet projections are from the New York Fed (see Federal Reserve Bank of New York (2017)). The estimated QE
multipliers are an average based on the following studies: Gagnon et al (2011), Krishnamurthy and Vissing-Jorgensen (2011), D'Amico
and King (2013), D'Amico et al (2012), Christensen and Rudebusch (2012), Bauer and Rudebusch (2014), Neely (2015) and Chadha,
Turner and Zampolli (2013). In the chart there's a wide range for the estimated impact. That's because the Fed bought (government
guaranteed) mortgage securities as well as government bonds and the per-$ impact depends on whether or not you count both. If you
view those asset classes as perfect substitutes, the quantum of QE1 would be larger and the per-$ estimated impact on bond yields
would be smaller. If you thought Treasury yields had been affected only by purchases of those specific securities the estimated per-$
of QT. We know the two aren't perfect substitutes because they have different
impact would be larger, as would the predicted effect
yields, but they're probably close substitutes. The true estimate must lie somewhere in the middle of the range (and
therefore within the
lighter-shaded part of the bar).
12
The impact was estimated using 30-minute decompositions around FOMC balance sheet communications.
Why might this be?
might have amplified QE's impact when it was first used was its sheer novelty
One thing that value. Once
markets discover the policy is feasible, perhaps the premium required for holding longer-term bonds is
permanently lowered, if only to a small extent.13
-
But there are potentially more important reasons why the later rounds of QE and in particular the early
-
stages of QT have had smaller effects. These are connected with the various ways in which QE actually
To understand why, it's worth stepping back and reminding ourselves what the mechanics of the
works.
policy actually are.
QE is sometimes described as "printing
money". That can be a helpful piece of shorthand. It can also be a
misleading one. It risks giving the impression that the central bank simply hands out wads of cash, getting
I've often heard, in particular, that QE involves "giving" money to the banks.
nothing in return.14
What actually happens is this (there's a stylised depiction at the back of
this speech): the central bank buys
government bonds, mainly from non-banks, on the open market. Imagine we pay for them with a cheque.
The seller of the gilt lodges the cheque at its own commercial bank, increasing the size of its deposit
holdings; that commercial bank, in its turn, sends the cheque back to us, increasing its deposits at the
And there's no direct effect on anyone's net financial
central bank (so-called "reserves"). position. The seller
of the gilt ends up with more money in its bank account but no change in its total assets. The two banks, of
the commercial and central variety, end up with larger balance sheets but the rises in assets and liabilities
are of equal size.
So perhaps a more accurate description of the process is that it replaces one liability of the consolidated
public sector (longer-term government bonds) with another (deposits at the central bank). The effect is to
depress the average maturity of those consolidated liabilities. And you might wonder, especially since both
Indeed, there's a famous neutrality
bonds and reserves pay interest, why this should do anything at all.
result in finance, originally applied to corporate balance sheets, that says exactly this. Under certain
conditions, when financial markets are functioning smoothly, pure financial transactions of this sort do
nothing. At least in this idealised theoretical setting, it makes no difference to its overall cost of capital if a
firm issues interest-bearing debt and buys back its own shares. The maturity profile of government debt
wouldn't matter for bond yields. And, viewing central bank money simply as the shortest-maturity liability that
the public sector can issue, nor would those yields respond to open-market operations by the central bank
13
Roughly speaking, the current price of an asset should correspond to what markets expect it to be in the future (appropriately
discounted). That expectation of future prices will take into account all possible states of the world, including those in which the term
and liquidity premia suddenly go up. If those are also circumstances in which the central bank might choose to buy the assets, then the
realisation this is possible could permanently raise their value, however unlikely those circumstances. They might now include a QE
"option value", if only a small one.
14
The phrase "printing money" is closer to Friedman's "helicopter drop", a thought
experiment designed to illustrate the implications of a
pure increase in the supply of money.
(QE).15 This is what Ben Bernanke was getting at when he quipped that QE is something that "works in
doesn't work in
practice but theory".
-
So why does it work in practice why has it had noticeable effects on bond yields (albeit to varying
I'm not to go into any great detail There's masses - -
degrees)? here. of stuff you can read if you wish to
The "bank
about the various mechanisms involved.16 Economists have generally focussed on three.
lending" channel emphasises the importance of banks' liquid assets, and the potential constraints that a lack
The "portfolio balance" channel,
of reserves can impose on their behaviour, including their appetite to lend.
generally reckoned to be more important after the 2008-09 financial crisis,17 stresses the direct price effects
on the assets purchased by the central bank, and sets out what's necessary for these to (What's
exist.
assets have "preferred habitats", and
usually required, in one form or another, is that holders of long-dated
- - -
can be persuaded to move out of them to sell those assets only by a rise in prices.) The third the
potential "signalling" effect - says what matters is what QE says about the central bank's intentions regarding
future policy, and in particular the likely path of official interest rates.
The point I want to make here is that all three can change. One might even say this is intrinsic to the effects
involved.
- the "bank lending" and "portfolio balance" channels -
The first two rely, in their different ways, on markets
being sufficiently imperfect that the neutrality result no longer applies. But markets are more impaired at
some times than others. Before the crisis, many financial assets were considered liquid. They could be
easily traded, prices were readily quoted and investors would happily switch between them, even in
-
response to relatively small changes in their relative price. The demand for central bank money was lower
- and "preferred habitats"
why would you need it if liquidity was easily available elsewhere? weaker. In that
environment, shifts in the central bank's balance sheet may not have had much
effect. It was when things
started to seize up, and markets became more dysfunctional, that these transactions really mattered. With
fewer assets considered liquid, the demand for central bank money went up. With preferred habitats more
entrenched, the effect of asset purchases on prices were larger. You might therefore have expected QE, at
least through these channels, to have become more important. Conversely, you might also expect their
15
The original result is Modigliani and Miller (1958). The result is generalised in Stiglitz (1969). Wallace (1981) applies it to open
market operations by the central bank.
16
See, for example, Benford et al (2009), Joyce, Tong and Woods (2011), Haldane et al (2016), Bhattarai and Neely (2016), and
Bernanke (2017).
17
If banks are constrained by a lack of liquid assets, then raising their deposits at the central bank can relax these constraints and
encourage an expansion of their balance sheets, including greater lending. Though Friedman and Schwartz were more concerned
about the behaviour of deposits, rather than lending, this is more or less the mechanism emphasised in A Monetary History and it does
seem likely that these constraints were very real at the time of the Great Depression. With no insurance of their deposit liabilities, and a
much greater potential for "runs", banks felt obliged to hold much higher levels of reserves. In monetarist language, the demand for
- -
money in particular the demand for the most secure and liquid assets of all, physical cash and central bank deposits rose very
significantly. It was the failure to meet this demand, Friedman and Schwartz argued, that so amplified the downturn. Circumstances in
the recent financial crisis were rather different and it's unlikely the "bank lending channel" was ever going to be as important as in the
1930s. Statutory reserve requirements are now lower or non-existent and deposits are insured. In 2008-09 banks were therefore
constrained not so much by a lack of "liquidity" as by a lack of equity: the fear was that, after significant losses, too many of them had
That's not to say the extra reserves supplied by
insufficient assets, whatever their composition, to cover their interest-bearing liabilities.
QE (and by direct lending to the banking system) were unimportant. No central bank would ever have taken the risk of failing to supply
But I don't think this is how they expected the policy to work, nor does the evidence
them, by whatever means. ex post show it to have
been that important (Butt et al (2014)).
impact to diminish once more normal market conditions are restored. While he was on the MPC my former
colleague David Miles gave a very clear and more detailed explanation of this point (Miles (2014)).18
"signalling effect" -
As for the third, it surely makes sense that the strength of the what markets infer from QE
decisions about future interest rates, and the central bank's intentions regarding its overall policy stance -
depends on what it communicates alongside its decision.
In the early phases of QE the policy was seen as an aggressive attempt to ease monetary conditions for an
Whatever else it might have done to depress the "term premium" -
extended period. the extra yield required
-
by long-maturity bondholders, even above their expectations of future short-term interest rates it also
complementary
lowered those rate expectations. QE and forward interest rates were effectively used in a
fashion, pushing in the same direction.
Something similar occurred, albeit in the opposite direction, when the Fed suggested in 2013 that it might
"taper This wasn't yet QT -
reduce the pace of its asset purchases (the so-called tantrum"). nor, in the
Congressional testimony that triggered the reaction, did Fed Chair Ben Bernanke refer directly to future
interest rates ("If we see continued improvement [in the economy] and we have confidence that that is going
to be sustained then we could, in the next few meetings, take a step down in our pace of [asset]
purchases").19 But it was taken as a sign of a more hawkish stance overall: because the Fed was getting
more optimistic about the economy, QE would be tapered and, the markets judged, official interest rates
would also begin to rise earlier than previously expected. As a result, and although the move was reversed
within a few months, US bond yields also rose significantly.
The communication around the Fed's "QT" policy was
rather different. When in the early part of last year it
first signalled its intention to start shrinking the balance sheet later in 2017, the FOMC went out of its way to
say that, to the extent the policy tightened monetary conditions, official interest rates would be that much
lower than they otherwise would have been. This is how Janet Yellen put it in a speech in January 2017:
"The downward pressure on interest rates that the Fed's asset
longer-term holdings exert is expected to
diminish over time -- a development that amounts to a "passive" removal of monetary policy accommodation.
Other things being equal, this argues for a more gradual approach to raising short-term rates".
In other words, rate rises and any tightening effect of shrinking the balance sheet should be seen as
-
s