Even gradual quantitative tightening raises GDP risks

Subject

Quantitative easing and GDP.

Significance

The US Federal Reserve (Fed), Bank of Japan (BoJ) and ECB have all conducted quantitative easing (QE) programmes since 2008, purchasing assets from commercial banks on a large scale and without predefined repurchase agreements. These purchases have swollen the balance sheets of the three largest central banks and provided commercial banks with large liquidity buffers.

Impacts

• The pace of the Fed withdrawing liquidity may slow; if US-China conflict worsens or another shock occurs, the Fed may consider reversing.
• In the euro-area, there are no new liquidity provisions, at a time when German GDP is weakening and Brexit threatens EU growth.
• New liquidity-provision plans may be hard for the euro-area to agree; if this is off the table, so are liquidity-withdrawing measures.
• The BoJ may stop scaling back its bond and ETF holdings if markets suffer; the upcoming sales tax rise will also hit spending.