Weak Note of Caution on Unconventional Monetary Policies

Emphasising a point it has made earlier, the Bank of International Settlements (BIS) in its December 2017 Quarterly Review has recorded a (weak) note of caution about the likely effects of the prolonged adoption of “unconventional” monetary policies in response to the 2008 financial crisis. Those policies involved keeping interest rates near zero and infusing large amounts of liquidity into the system, with the expectation that this would spur investment and consumption demand and ensure robust recovery from the recession. In the United States (US), the Federal Reserve had resorted to a policy of “quantitative easing” involving purchases of Treasury Securities of between $45 million and $75 million a month. A similar policy was adopted by the European Central Bank (ECB), which after some hesitation accelerated its acquisition of bonds starting 2014 in response to extremely low growth.

Overall, the six central banks that adopted policies of “quantitative easing”—the US Federal Reserve, the ECB, the Bank of Japan, the Bank of England, and the Swiss and Swedish central banks—now hold more than $15 trillion worth of assets, or more than four times the pre-crisis level (Allen and Fray 2017). The US Fed’s balance sheet, which placed its assets at a little less than $1 trillion before the crisis, now records an asset figure of $4.5 trillion, or around a quarter of US gross domestic product (GDP). The ECB too has accumulated assets of $4.9 trillion, or around two-fifths of its GDP on its balance sheet.