Quantitative Easing Lives on in the EU

Central bank quantitative easing is a little like a zombie. It dies – but it never really dies.

There’s been a lot of focus on the Federal Reserve raising interest rates and unwinding its balance sheet. Sometimes it’s easy to forget the Fed isn’t the only game in town. While most people consider QE dead and buried in the US, it remains alive and kicking in other parts of the world.

Yesterday, the European Central Bank (ECB) announced it would extend its bond-buying program deep into 2018, continuing the flow of easy money into the European Union. ECB President Mario Draghi said the central bank would cut its bond purchases in half beginning in January, a faint hint at eventual normalization. But the central bank president left the door open to backtracking.

Draghi said the EU’s economy is improving, but still needs support.

Domestic price pressures are still muted overall and the economic outlook and the path of inflation remain conditional on continued support from monetary policy. Therefore, an ample degree of monetary stimulus remains necessary.”

The current ECB bond-buying program launched nearly three years ago. According to Reuters, the central bank has purchased more than 2 trillion euros worth of bonds, depressing borrowing costs and lifting “growth” (AKA blowing up bubbles).

Investors are calling Draghi’s move a “doveish policy tightening.” Even with the slowdown of bond purchases, the ECB will continue to buy 30 billion euros worth of bonds each month. The ECB also kept open the option of raising or extending buys and promised to reinvest maturing funds for years to come. Draghi called it an “open-ended program.”

This is not tapering, it’s just a down-size. The decision today is for an open-ended program … it’s not going to stop suddenly. There is still a large amount of uncertainty.”

In other words, the emphasis is heavy on “doveish” and not so much on policy tightening.

The euro plunged in the wake of the announcement. According to Reuters, “investors played the diverging monetary policy outlook view between the US and Europe where the former is expected to raise interest rates again before the end of the year while the latter is not expected to raise interest rates in the coming years.”

Many European analysts said they were surprised at the lack of hawkishness in the ECB announcement. For instance, Rabobank strategists said:

From a broader point of view, we are somewhat surprised that the ECB did not take the opportunity to mark a sharper break with its current policy settings.”

European stock markets loved the continuing QE. European shares hit five-month highs the day after the announcement. Saxo Bank A/S CFO Teis Knuthsen told Bloomberg Draghi’s announcement was a “really doveish signal.”

Markets have been doing nothing all month and then Draghi comes up with what is essentially QE infinity.”

In other words, the ECB will continue to pump air into European bubbles.

Just last month, Tiger Management co-founder Julian Robertson unequivocally called the US stock market a bubble and blamed it on the Fed’s interventionist monetary policy  – the same policy the ECB continues to pursue today. Several reports noted the meteoric rise in US stocks and predicted that with continuing stimulus, European markets are poised to follow.

It’s interesting that the Fed and the ECB are going in totally opposite directions. One has to wonder how long that can last. Draghi seems to understand he can’t just cut off the supply of drugs (easy money) to the addict (European markets.) Meanwhile, Yellen seems determined to put her junkie in rehab and gradually wean him off the drugs. But if the patient goes into withdrawal – if the air comes out the bubble and the stock market starts to tank, will Yellen (or her predecessor) have the guts to hold course? Or will the Fed follow the ECB and revive the QE zombie?

One thing for certain – QE is never really dead. He may be lying on a slab in the US, but he’s alive and kicking in Europe. Sometimes it’s wise to look beyond the shores of America.

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