QE, too

Quantitative easing is here with a vengeance. Japan, the UK and Switzerland are doing it. Now the US is too, with Canada and Sweden expected to follow next. There are important differences, though, between the monetary policy of the US and the rest. Not all QE is equal.

Ostensibly, all central banks using QE are targeting the quantity of money in the system – hence “quantitative easing”. What they really seem to want to do, however, is to influence other key variables, such as bond yields and, in some cases, the exchange rate. Both fall sharply when QE is announced.

Buying government and corporate bonds with money created for the purpose will, it is hoped, reduce all borrowing costs. Meanwhile, a lower exchange rate can help the economy as a whole. It boosts the competitiveness of exporters at a time of falling world demand. It can also help loosen monetary policy generally, the reason the Swiss central bank gave when it began QE.

The European Central Bank has so far abjured such policies and focused on boosting bank lending instead. That is partly because bank credit plays a larger role in the eurozone, and partly because the ECB lacks a central treasury that could replenish its coffers for any subsequent losses suffered from buying bonds. What none of these central banks has done, however, is to pick which companies or sectors should survive or perish. That job has been left to the market.

The US Federal Reserve has been slightly different. It has tried to target the price and distribution of credit more precisely. This has been done through schemes such as the commercial paper programme – designed to boost corporate liquidity, or the Talf initiative – designed to boost consumer lending.

Now, by saying it will buy up to $1,250bn of mortgage-backed securities alongside $300bn of Treasuries, it has targeted the cost of home loans too. Other central banks have not gone this far. Some take this as a sign of the Fed’s innovativeness. Others that it has run out of high-value cards to play and has now gone “all in”.

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