Specialist
Former executive at Deutsche Bundesbank
Agenda
- Core similarities and differences across ECB (European Central Bank), BoE (Bank of England) and Federal Reserve's strategies
- How aggressive will QT (quantitative tightening) programmes be?
- The likelihood of programmes being completed
- How QT will show in financial markets
- Demand for sovereign bonds as central banks wind down balance sheets
Questions
1.
Central banks have obviously undertaken gargantuan QE [quantitative easing] programmes in response to the pandemic, which is off the back of their responses to the great financial crisis. There was a period where central banks were starting to tighten their balance sheets and there were some adverse market reactions to that, such as the taper tantrum we saw in 2017-18. What are the tightening tools that are available to central banks as they look to take out some of this liquidity that they’ve been giving to the financial system?
2.
Which monetary policy tool do you think is currently the bluntest?
3.
Can you see any diversion in the way that the Federal Reserve, ECB [European Central Bank] and BoE [Bank of England] continue their tightening cycles?
4.
How might QT [quantitative tightening] be differently operated in the different central banks?
5.
Why do you think the Bank of England has been able to start some form of unwinding without instigating the same effects that could occur when the Fed would potentially announce a form of unwinding?
6.
How does central banks’ use of primary tools such as targeting rate changes and the use of forward guidance impact the pace that a central bank could unwind?
7.
How much is credibility going to play a role within the Fed, ECB and Bank of England’s abilities to execute the tightening programmes? Which of these central banks do you think has the most market credibility at the moment?
8.
You said that inflation has peaked in the US. How long do you think it will take for the Fed to get back to its target? I think a lot of central banks are almost stuck between a rock and a hard place at the minute. They’re having to walk this very thin tightrope. What do you think the chances are of getting a hard landing against a soft landing for the Fed, ECB and Bank of England?
9.
The reason that we’re having to do QT is, obviously, because we had the QE programmes over the past couple of years. How much asset price inflation do you think they potentially led to vs when we see further unwinding of balance sheets? How much asset price deflation could be experienced in markets?
10.
Why has QE been so challenging to undo historically?
11.
If the Fed were to announce that it was going to unwind rather than stop reinvesting the interest component of its current holdings, do you think we would see a taper tantrum again?
12.
Just after the Bank of England started unwinding, Liz Truss became the UK Prime Minister and the bank had to essentially reverse the QT that it had started doing and set up a facility to give stability to the pension funds at risk, so it’s instantly almost reversed the QT cycle it had started. Do you think central banks would try to not resort to QE as easily, or will they go straight to QE as the first tool they use if they see some risks to financial stability?
13.
Do you think having financial markets think that QE will be used very quickly if needed and that there’s always going to be that helping hand in support there for them leads to more risk-taking behaviour? Can they get into that too-big-to-fail mindset and the LOLR [lender of last resort] function is used quite quickly and rapidly?
14.
Is there a way to incentivise bail-ins? By bail-in, I mean the financial system bailing itself out, so a bank bailing out another bank, over taxpayer-funded bail-outs, through these macro-prudential tools and settings.
15.
Theoretically, how quickly could the central banks we’ve been discussing unwind?
16.
In terms of QE throughout the great financial crash, there was a rush for liquidity in the financial sector and a high risk of insolvency. During the pandemic, that QE response wasn’t necessarily for liquidity reasons, it was for financial stability, which I guess has some read-through. Part B of that for coronavirus was to help governments finance the spending programmes that they needed to undertake to help their economies get through that challenging period. Do you think governments were over-reliant on selling their treasuries to central banks?
17.
How much market demand do you think there’s going to be for QT, or as government treasuries, really, in sovereign bonds going forwards? I know you’ve mentioned that it’s been relatively well-received in the UK so far. How can you see demand for additional securities playing out over the next 6-12 months?
18.
What happens if central banks try to unwind? I think I’m correct in saying that primary dealers have to bid for sovereign securities. What would happen if they start bidding at 50 to par or something similar? Are there scenarios where that could occur?
19.
The Fed has some yield curve inversion, which shows the way that the market is pricing its current environment. Can you see some form of YCC [yield curve control] happening to assist with that unwind? Is that possible?
20.
How do you think QT programmes are going to start showing themselves in financial markets?
21.
How much additional negative pressure could be exerted through QT programmes on financial market asset prices, if we’re looking at FTSE or S&P, or just market prices in general?
22.
Theoretically, what do you think the likelihood is of programme completions? By this I mean the target is to unwind at some point to the balance sheet levels we saw around 2019 for central banks. What time frame is achievable to reach that target?
23.
What will you be monitoring going forwards around QT? Are there leading indicators or signals that could be telling for future QT pace or impacts? Could this show in central bank language?
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