U.S. Fed's unlimited QE policy does not go without price -- UBS economist

Xinhua News
2020-05-28 00:44

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by Xinhua writer Yu Jiaxin

London, May 27 (Xinhua) -- Each round of Quantitative Easing (QE) of the United States will be less effective and the cost of such policies cannot be ignored, an economist from UBS has said.

"From its previous rounds of QE, we could see it tends to push down rates, weaken the exchange rate, support asset prices, and increase debt," Juha Seppala, director in the Macro Asset Allocation Strategy team at UBS Asset Management, told Xinhua via email.

The U.S. Federal Reserve announced in late March that it was racing to rescue the U.S. economy amid COVID-19 pandemic through an unlimited QE program, taking the Fed's monetary policy tools to the extreme as some observe.

"These monetary policies have been very impressive in calming the markets but it is worth remembering that the Fed can only address the liquidity issue, not the solvency issue," said Seppala.

The latter will depend on fiscal policy. The jury is still out even if the current stimulus will be enough and implemented effectively, he added.

In Seppala's view, answers to these questions will depend largely on how the epidemic will evolve over the next quarters, questions such as when people can get a vaccine and whether there will be a second wave, should be taken into account.

"The answers to those questions, in turn, will impact how the consumers and firms are going to change their behavior, which will ultimately dictate how effective government policies will be," he said.

Seppala pointed out that it is hard to see an alternative. When the economy is hit by such a big shock, the government has to try and implement a bridge to normalization. Otherwise, significant recessions will have a very negative and long-lasting impact on the national wealth, health and skills.

But he also admitted that each round of QE has been less effective as its "shock and awe" effect gets dampened by repetition. "Hopefully, unlimited QE will be an improvement."

When talking about the possible negative impact, he pointed out that the benefits and costs of such policy have not affected all sectors of the economy equally, which may in turn have contributed to the increase in populism that the Western world has experienced in recent years.

"Also we don't yet know how much private and public debt the market economies can sustain but we are moving closer to the limit," he added.

Globally, Seppala said, QE is likely to generate more debt and associated market risks in other countries, especially for emerging economies once the policies are withdrawn by the United States and other countries.

The United States should spare no efforts to curb the spread of the novel coronavirus at the moment and address the structural problems of its economy in the long run, he said.

He also highlighted the significance of international cooperation amid the crisis. "One should hope that major economies around the world are able to coordinate monetary policy and fiscal policy in a cooperative way to cope with the crisis," he said.

According to the latest figure from the Center for Systems Science and Engineering at Johns Hopkins University, more than 1.68 million confirmed COVID-19 cases have been reported in the United States as of Wednesday morning, with nearly 99,000 deaths.
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