To be sure, the idea of “QE infinity” has been around for quite some time.
Once it became clear that the globalization of unconventional monetary policy had, for all intents and purposes, served to elevate central bank stimulus above economic variables and common sense in the eyes of market participants, it began to look as though withdrawing that stimulus might well prove to be impossible without triggering an outright meltdown in capital markets.
Still, the assumption was that eventually, trillions in global QE and seven years of ZIRP would conspire to resuscitate global demand and trade at which point the central banks of the world would ever so gradually begin to roll back stimulus.
Only that’s not what happened.
Instead, global trade has remained in the doldrums and the unprecedented effort to keep capital markets accommodative has actually contributed to a worldwide deflationary supply glut. That, in turn, has hit commodity currencies especially hard, pushing emerging markets to the brink. China’s move to join the global currency wars muddied the waters even further and once the Fed admitted that in the current environment, it’s impossible not to be market dependent, QE4 essentially became inevitable.
In short, if the Fed hikes to telegraph its confidence in the US economy, EM will careen into crisis and that will feed back into advanced economies forcing the FOMC to reverse course. If the Fed remains on hold in an effort to avoid triggering more EM outflows, DM risk will sell off as market participants interpret a dovish FOMC as indicative of a worsening outlook for US economic growth and inflation expectations. And then there is of course the possibility that by keeping the world in suspense, the Fed is contributing to the uncertainty that plagues emerging economies and that keeps investors on edge.
Between this and the fact that global demand and trade appear to be grinding to a halt (just ask the WTO, the OECD, and the ADB who have all voiced their concerns in the past two weeks), the only way out for the Fed appears to be a return to QE which would simultaneously (albeit temporarily) i) realign Fed policy with the ECB and BoJ, ii) provide a bid for domestic risk assets, and iii) send the "right" message to EM regarding the FOMC's concern for keeping the situation from deteriorating further.
Against this backdrop we present the following from FT which is just the latest example of everyone admitting the inevitable:
The Federal Reserve will pursue another round of quantitative easing before it increases interest rates, according to economist Jerome Booth, who said a premature rate raise would trigger a recession in the US.
The former head of research at Ashmore, the emerging market fund house Mr Booth co-founded in 1999, said the Fed was right to keep interest rates unchanged at its last meeting and predicted it would begin a fourth round of bond-buying before rates were increased.
“What we have had is a jobless recovery in the US and so the Fed could not afford to cause another depression by raising interest rates. QE4 will be their next move, which is now much more likely than a rate hike.”
Peter Schiff, an outspoken opponent of the Fed and chief executive of Euro Pacific Capital, a US investment firm, said:
“We are going to see more weakness in the US jobs market and the Fed did not want to add to the disappointment with a rate hike.
“I don’t think they ever intended to raise rates. The whole thing was just a bluff and they will come back with QE4 first. That is going to hurt the real economy just like QE3 did but it will blow some air back in the stock market bubble.”
And the punchline to the whole thing is this: the more unconventional monetary policy you employ, the more exaggerated the financial cycle becomes, which in turn leads to ever larger booms and subesequent busts...
...which then serve as the excuse for more QE...