The Long, Unwinding Road Of Quantitative Easing

Authored by Mark Burgess via Columbia Theadneedle Investments blog, 

Quantitative easing has served as a life raft for many of the world’s economies. Now central banks face the prospect of moving on, but the question is: how?

For investors, the implementation of quantitative easing (QE) has had many benefits, but the withdrawal of this extraordinary monetary support is likely to result in some negative effects such as market volatility. However, while investors should be aware of the potential outcomes, the unwinding process will not be fast or easy for any of the world’s central banks.

The background

QE is a form of monetary policy that involves central banks purchasing securities to increase the money supply and encourage economic activity. It first reared its head in 2001 when the Bank of Japan (BoJ) found itself backed into a corner: it needed to stimulate the economy, but it couldn’t lower nominal interest rates any further. So the BoJ became the first central bank to purchase government bonds, financed by creating central bank reserves. Following the global financial crisis, central banks in the U.S., U.K. and Europe followed suit, pumping large amounts of money into the banking system to prevent it from collapsing.

It’s been a decade since the start of the crisis, and it’s time to think about what happens next. Despite a fairly uniform decision to undertake QE across developed markets, the methods have differed and so will the approaches to unwinding it. Let’s consider the likely next steps of central banks around the world.

The United States

The first place we may see an unwinding of QE is in the U.S. QE bond purchases were completed in 2014, leaving the Fed with a portfolio of $4.5 trillion on its balance sheet. It has since maintained this level by rolling over debt and reinvesting any principal. As the Fed considers when it can begin to reduce its balance sheet, it continues to make small rate hikes along the way. Seeking to avoid a repeat of the 2013 taper tantrum, which led to a surge in U.S. Treasury yields, the Fed has also passed a lot of hints to the markets so as not to spook them.

As the Fed continues its gradual rate increases, we’re likely to start to see balance sheet reinvestment slowing down. If all of the debt is allowed to roll off as it matures, there would be a sharp decrease in the Fed’s balance sheet in 2018 until it flattens out in 2024. To avoid such a large shock to markets, a staggered approach to unwinding QE would be more likely and would help the Fed maintain some flexibility to respond to the markets' reaction.

The United Kingdom

The next place to begin the unwinding process would be the U.K. However, any unwind is almost impossible at this time because U.K. banks currently depend on the money supply from QE to meet their prescribed regulatory buffers. Removal of this money will leave financial institutions fighting over any remaining liquidity to avoid falling foul of these regulations. The way around this is to reduce the amount banks are required to hold in buffers, but it’s unlikely that central banks will want to take away that safety net.

QE has also had some unintended consequences in the U.K. that need to be addressed. For example, artificially low rates have inflated house prices, which have led banks to insist on larger down payments, effectively shutting out many potential buyers. Defined pensions are also now at risk. Benefit pension liabilities have risen because interest rates have remained low, but pension assets haven’t risen by the same amount. In addition to these thorny issues, the unwinding of QE is also complicated by the uncertainty introduced by the Brexit process. So perhaps this is not the time for the Bank of England to make its move.


We’re seeing good economic numbers coming out of Europe, which could suggest that further QE isn’t likely. Earlier this year, European Central Bank (ECB) President Mario Draghi stated that policymakers were confident that they had removed the threat of severe deflation. Couple this with a calmer political outlook, and we are likely to see the ECB back off on QE.

The first stage for Europe has been to signal the end of QE bond purchases before an actual halt. Draghi has outlined four necessary conditions for inflation before unwinding QE can be considered: it must be medium-term, durable, self-sustained (not reliant on the extraordinary monetary policy) and broad-based across the eurozone. It may be some time before this happens, and even if interest rates start moving at the end of next year, the balance sheet won't shrink until 2020 or 2021.


As previously mentioned, Japan was the first to use QE and is most likely to keep meaningfully extending its balance sheet beyond 2017. In fact, Japan is potentially decades away from its desired inflation target, and even if it’s reached, it will have to be sustained for a long period of time. The BoJ has faced a great deal of criticism, including claims that it waited too long to implement QE and tightened monetary policy too quickly. When it comes to unwinding, the BoJ may wait for the Fed to move so it can learn from its mistakes.

The bottom line

The inevitable unwinding of QE is getting increasing attention. Although investors should be mindful of the potential for volatility as monetary policy normalizes, it will likely be an extended process and a long road to get there.


Looney Four chan Tue, 08/08/2017 - 14:15 Permalink

  … “For investors, the implementation of quantitative easing (QE) has had many benefits” Here’s one of those “benefits”. Oprah’s windfall on Weight Watchers hits $340 million Weight Watchers’ stock has rocketed 6-fold since Oprah Winfrey bought her stake… Meanwhile, Oprah’s ass has only quadrupled in size on the Weight Watchers’ Diet.   ;-) Looney

In reply to by Four chan

Too-Big-to-Bail (not verified) Tue, 08/08/2017 - 14:17 Permalink

A default by any other name just wouldn't be by default --Sorry Fed you could only keep it going almost a decade after the crisis. Maybe if you employed the special skills of Bernie Madoff you could have kept the dream alive longer.

libertyanyday Tue, 08/08/2017 - 14:22 Permalink

there is a lot of time invested in this whole QE issue..for what?  The FED should let its balance sheet go to 100 trillion........1) Please tell me why the FED must reduce its balance sheet.2) why do we hide behing primary dealers for buying us debt, just monetize it outrigtht,  yea yea no one cares that its not ' legit '.3) so what if inflation gets to high, that just devalues the dollar and defaults away debt.The fed needs to be buying us debt not trying to sell it.

gregga777 Tue, 08/08/2017 - 14:24 Permalink

"The inevitable unwinding of QE is getting increasing attention."

ROTFLMAO (rolling on the floor laughing my a** off). QE will NEVER be unwound and it hasn't even stopped. In fact, due to the Thermodynamic Oil Collapse QE will NEVER stop. The status quo elites are desperate to cover up, for as long as possible, theTOC. Then they are going to get out of Dodge before they wind up swinging from lampposts by neckties.

youngman Tue, 08/08/2017 - 14:31 Permalink

They will never will go to hundreds of trillions first.....the politicians and the Givemedats will never go for a reduction in their spending many votes to buy....the pension defaults have not even hit yet....when those come watch the amount jump to the moon...

jharry Tue, 08/08/2017 - 15:14 Permalink

Richard C. Koo seems to think improvements can be made if the Fed shoves money into the economy to get people to borrow instead of repaying debts. He noticed that after an inflationary period, when  interest rates go so low, people see their balance sheets as vulnerable and pay back debts. This happened to Japan years ago, and it's happening here now.  Money circulates at a very low rate and causes eco. problems.

World citizen Tue, 08/08/2017 - 15:12 Permalink

The time on the raft is equal to the time needed to be rescued by a passing ship or to land somewhere. Meanwhile it is a very good idea to STAY on the freaking raft!

Batman11 Tue, 08/08/2017 - 15:47 Permalink

The Central banks are now keeping this dead duck alive with ultra low interest rates and massive liquidity injections into the global financial system from the ECB and BoJ.If we took it off Central Bank life support, we would find it had died some time ago.Oh dear.

Herdee Tue, 08/08/2017 - 15:49 Permalink

Ben Bernanke "Interest rates will never normalise during my lifetime." Take that seriously, he should know, he helped create the mess.

hola dos cola Tue, 08/08/2017 - 15:55 Permalink

Forward your next tax form to the FED.If you can grapple the logic of that, you also see that's the right thing to do.If not, well, the FED is printing for everybody else, why not directly* for you?*The FED printing raises The National Debt, which is also partly your debt. The FED also prints for the banks that loan it to you which raises your debt that you indirectly use to pay your tax that is used to settle a part of the National Debt.The FED also wants to achieve higher inflation. That inflation comes straight outof your pocket, for which you will take on more debt. If the FED would directly pay(print) your tax bill, you have more left to cope with the rising inflation and it reduces the risk you would at some point default on your part of the National Debt.So, it's a mere patriotic gesture to send your next tax form directly to the FED. P.S. Before you ask, I have no ambition to Chair the FED.

Know shit Tue, 08/08/2017 - 16:52 Permalink

It was fun playing for God ( at least I hope so?).

So they printed money like there was no tomorrow, made governments, businesses and normal people addicted to cheap money.
The consequences slowly became clear, low interest rates, inflation around the corner, more and more money looking for a yield, and simply everything and everyone in more debt than thought possible.
Well it is more debt than possible as the future will prove.

How will we all get out of this shit?
To much debt to raise interest rates, to little yield for all those promises made (do I hear someone asking about our pensions?)

Borrowing money is pulling wealth from the future.
Well guess what, that future will be here a lot sooner than most anticipated or hoped for....
And guess again, things you borrow need to be paid back with interest...

Take care.

Jack4952 Tue, 08/08/2017 - 17:40 Permalink

The BIG BANKS (or more specifically, those people that REALLY own them) will come out the upcoming financial and social disaster OK.They ALWAYS do !!!

Last of the Mi… Tue, 08/08/2017 - 18:24 Permalink

I agree, I think they have printed themselves  into the "coffin corner" of the economic envelope. They've gone way past any sort of "easing" into just plain vapid money laundering for the wealthy. Hell, if has even affected our government and or social structure. The Googleassholes of the world want your mind not your work. You will believe what they say or else. There is no way back to normalcy without crossing a fucking ravine. And there be dark monsters. We'll just have to wait and see. I don't for a second believe they've quit printing, not with the valuations in the stock market and the rest of the world struggling to pay their ObamaScare premiums from month to month. It is. . . a show.

PGR88 Wed, 08/09/2017 - 00:37 Permalink

Bullshit.  QE will never be unwound.It will sit, for years, until inflation reduces it to piddling levels, or it is written off