Can they stop their bond-buying without upending markets?
THE DEBATE over the effect on markets and the global economy of quantitative easing (QE), the purchase of bonds with newly created money, is almost akin to a culture war. To its critics unrestrained QE during the pandemic has covertly financed governments while inflating asset prices and boosting inequality. To its fans QE is an essential tool in which economists have justified and growing confidence. This high-stakes debate is about to enter a new phase.
Rich-world central banks’ balance-sheets will have grown by $11.7trn during 2020-21, projects JPMorgan Chase, a bank. By the end of this year their combined size will be $28trn—about three-quarters of the market capitalisation of the S&P 500 today. But central bankers are about to turn this mega-tanker of stimulus around.
The justifications for QE have almost dissipated. At the start of the pandemic, central banks bought bonds to calm panicky markets amid a flight to safety and a dash for cash. Then it became clear that the pandemic would cause an enormous economic slump that would send inflation plummeting; QE was necessary to stimulate the economy. Today, however, markets are jubilant and inflation is resurgent.
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Jerome Powell, the Fed's chairman