QE re­ver­sal to suck $1.2 tril­lion from global fi­nan­cial sys­tem

The Daily Telegraph - Business - - Front Page - By Tom Rees and Anna Isaac

CEN­TRAL banks risk trig­ger­ing an­other wave of volatil­ity on mar­kets by drain­ing $1.2 tril­lion (£930bn) from the global fi­nan­cial sys­tem, top an­a­lysts have warned.

The Fed­eral Re­serve is suck­ing liq­uid­ity out of the sys­tem by re­vers­ing quan­ti­ta­tive eas­ing (QE) amid fears that De­cem­ber’s volatil­ity was sparked by the US cen­tral bank re­mov­ing the bond-buy­ing stim­u­lus.

Wall Street an­a­lysts at Mor­gan Stan­ley have warned that re­vers­ing QE “played an im­por­tant role in the late 2018 mar­ket volatil­ity”, pre­dict­ing that the Fed will be forced to end quan­ti­ta­tive tight­en­ing (QT) later this year.

The Fed­eral Re­serve is suck­ing liq­uid­ity out of the sys­tem by re­vers­ing quan­ti­ta­tive eas­ing amid fears that De­cem­ber’s volatil­ity was sparked by the US cen­tral bank re­mov­ing the bond­buy­ing stim­u­lus.

Wall Street an­a­lysts at Mor­gan Stan­ley have warned that re­vers­ing QE “played an im­por­tant role in the late 2018 mar­ket volatil­ity”, pre­dict­ing that the Fed will be forced to end quan­ti­ta­tive tight­en­ing (QT) later this year.

A decade of cheap bor­row­ing costs, a re­sult of cen­tral banks pump­ing liq­uid­ity into mar­kets to tackle the credit crunch, may have lulled com­pa­nies into a false sense of se­cu­rity about cheap debts, hav­ing gorged on them, caused by banks low­er­ing bor­row­ing costs through in­ter­est rate cuts and QE, ana­ly­ists warned.

“Cor­po­rate debt rel­a­tive to GDP has risen to the high­est it has been for 70 years,” ex­plained Mike Bell of JP Mor­gan As­set Man­age­ment.

The Fed is let­ting its $4.5 tril­lion bal­ance sheet of bonds built up through QE wind-down. By the new year, global cen­tral banks’ bal­ance sheets are ex­pected to shrink by around $1.2tril­lion to $14.6 tril­lion since their 2018 peak.

This year will be first time cen­tral banks will col­lec­tively re­duce their bal­ance sheets, with­draw­ing a key sup­port for mar­kets. The ECB is also no longer con­tribut­ing to liq­uid­ity, hav­ing ended its QE pro­gramme in De­cem­ber.

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