EuroWeek View: Is there an exit from QE, and if there is, will someone tell us?
It would be mad to think that central banks around the world are about to slam the brakes on official stimulus. But the reaction to Ben Bernanke’s slightest of suggestions is a warning that central banks not only need a plan for how to unwind QE — they also need to talk about it.
Investors have started to think twice before jumping into new debt issues, after the prospect of less quantitative easing was suggested by Federal Reserve chairman Ben Bernanke three weeks ago. With the sell-off worsening, bankers in the investment grade market were forced last week to priced deals back of guidance.
Even in the public sector — where economic fundamentals seemed a thing of the past and where buying any deal that flashed up on screens in the maximum size possible seemed to have become the norm — deals suffered. Belgium’s dollar offering, a trade that surely would have flown out of the door a couple of weeks ago, did not reach full subscription. All of a sudden, the buysiders are a cautious bunch.
Whether this turns out to be a mere correction of yields that were plainly far too low to be of any use to anybody — apart from those borrowers whose consideration stretches no further than their own balance sheet — remains to be seen.
But what is clear is that investors will stop buying new issues and liquidity will dry up if those investors do not know the destiny of the trillions of dollars worth of official stimulus that has kept markets afloat in recent times.
It was a popular criticism of QE in its early stages that policymakers had no exit route from it. It is to be hoped that over the years they have formed one, but there is still no sign from most officials of what their plans might be. Even Bernanke has provided only the broadest of hints.
Until there is an open and frank discussion about the exit from QE, and as the expectation of that running-down of stimulus programmes becomes more imminent, buy-side reactions will become ever more extreme. At worst, they could undo any benefits that QE may have delivered in the first place.
QE may have been a policy entered into in haste, necessarily so perhaps. But now is the time to prepare investors for a considered withdrawal. As the last few weeks have shown, the markets abhor an information vacuum.