Fed bond buying signals new round of global QE

By DOMINIC JEFF
Published on 16/12/2012 00:00

THE US Federal Reserve’s doubling of its bond-buying programme signals a massive synchronised bout of quantitative easing (QE) from the world’s central banks that could eventually involve printing money to pay for infrastructure projects.

Research by Credit Suisse suggests central bankers in Europe, Japan, the UK and US will step up their asset purchases next year and persist until their economies return to robust growth and government debt levels have stabilised – a process that could take a generation.

And they believe the Fed’s move from limited to open-ended asset purchases, as well as the Bank of England’s increasing focus on direct funding to the UK’s banks, is a move towards more unconventional forms of monetary policy that could prove more effective at stimulating the economy than bond buying.

Last week the Fed upped the size of its monthly asset purchases from $40 billion (£25bn) to $85bn and committed to keep interest rates low at least until either the US unemployment rate falls below 6.5 per cent or inflation threatens to get out of control.

The vast amounts of ­money being created may condemn the West to decades of high inflation but should ­ensure other countries avoid Japan’s fate of the last two decades – a stagnant economy and falling prices and ­asset values. Japan itself is expected to unleash the ­biggest and most unconventional wave of QE yet after today’s general election.

Credit Suisse’s economists said: “We regard the Fed announcement as a further step towards synchronised QE.

“Over time, we expect QE to become increasingly unconventional, by shifting to open-ended programmes, to conditional bank funding programmes [as in the UK] and ultimately to the direct financing of infrastructure projects.”