Central Bank quantitative easing history
The theory that underlies quantitative easing is relatively straightforward. In practice, however, different central banks have implemented quantitative easing in different ways, for different reasons, and often with very different (and hard-to-predict) results. It is important to understand how central banks’ monetary policy programs have worked in practice before formulating a trading strategy.
Federal Reserve (FOMC)
Supply of bank credit and exchange of treasury securities in the US is controlled by the Federal Open Market Committee (FOMC), a branch of the Federal Reserve. Formed in 1933, the FOMC soon began permanent open market operations (POMO), such as the continual purchase and sale of US Treasury securities in order to influence interest rates.
While Alan Greenspan’s tenure as chair (which began in 1987) was characterised by ongoing indirect quantitative easing through repurchase agreements, it was after he stepped down in 2006 that the Fed began direct quantitative easing, specifically in response to the global financial crisis. In November 2008, the Fed purchased $600bn-worth of mortgage-backed securities (MBS) in response to the sub-prime mortgage crisis. This was expanded in March 2009 with an additional $750bn of MBS and $300bn in Treasury security purchases.
In a second round of quantitative easing, the Fed purchased $600bn longer-dated treasuries at $75bn per month between November 2010 and June 2011. A third round was announced in September 2012, involving $40bn of MBS purchases per month in an attempt to ‘substantially’ improve the US labour market. This was tapered out between December 2013 and October 2014.
During the coronavirus pandemic, between March and July 2020, the Fed purchased $3tn in financial assets and engaged in a bond-buying programme from August 2020. Monthly bond purchases of $120bn were pledged to support the economy’s recovery from the pandemic as vaccinations were rolled out.
Bank of England (BOE)
During the financial crisis, between March and October 2009, the Bank of England (BoE) purchased £175bn of assets (mostly UK government debt – gilts – as well as some high-quality corporate debt). In November 2009, the Monetary Policy Committee (MPC) voted to increase this to £200bn. By July 2012, the total had risen to £375bn.
Brexit was the next event that saw the BoE announce purchases of £60bn-worth of UK government bonds. The central bank also purchased £10bn of corporate bonds in August 2016 to allay concerns over the economic impact of Brexit.
Its most recent round of quantitative easing was during the coronavirus pandemic. An emergency meeting in March 2020 led to the announcement of £200bn-worth of government bond purchases, with £100bn and £150bn announced in June and November 2020, respectively. This brought total quantitative easing in the UK to £895bn.
European Central Bank (ECB)
During the European debt crisis, the European Central Bank (ECB) began buying covered bonds in May 2009 and purchased €250bn of sovereign bonds from member states in 2010 and 2011. Until 2015, the ECB was reluctant to refer to these activities as ‘quantitative easing’. In January 2015, the bank changed tack, and ECB President Mario Draghi announced €60bn in monthly purchases of euro-area bonds. This amount was increased to €80bn in March 2016 and continued to December 2018 (by which time it had been tapered down to €15bn monthly). Purchases were resumed at €20bn monthly rates from September 2019.
In March 2020, the ECB announced a Pandemic Emergency Purchase Programme (PEPP) of €750bn, which was increased by €600bn on 4 June and by €500bn on 10 December, to a total of €1.85tn. The programme’s aim was to reduce the cost of borrowing and increase lending in the eurozone.
Bank of Japan (BoJ)
The Bank of Japan (BoJ) was the first central bank to implement a quantitative easing policy, which it did in the early 2000s to counter deflation, despite describing quantitative easing as ineffective for years. In March 2001, the bank purchased large amounts of government debt in order to increase liquidity in the banking system. In four years, this policy added ¥30tn to commercial bank current account balances.
In an attempt to reduce the US dollar value of the yen and thereby encourage exports, the BoJ did ¥5tn of asset purchases in 2010. The policy was unsuccessful. In August 2011, the BoJ increased the commercial bank current account balance from ¥40tn to ¥50tn. In October, the BoJ’s asset purchase programme increased to ¥55tn.
In April 2013, the central bank again announced an increase to its asset purchase programme, to ¥60-70tn annually. The aim was to reverse deflation with a target inflation rate of 2%. The policy was expected to double the money supply and has been dubbed ‘Abenomics’ after Shinzō Abe, the Japanese Prime Minister who oversaw the policies. The BoJ did it again in October 2014, when its asset purchase programme increased to ¥80tn bonds annually.
However, from 2016, the BoJ switched to an approach called yield curve control (YCC) with the objective of keeping 10-year Japanese government bond yields at close to 0%. This enabled it to scale down its bond-buying programme.
People’s Bank of China (PBOC)
Speculation abounded that China’s central bank had implemented quantitative easing during the 2020 Covid-19 pandemic. Holdings of sovereign bonds by ‘other’ investors (which can include central banks) rose by CN¥196.5bn to CN¥1.78tn in July 2020, according to Bloomberg. The figure had risen just CN¥24bn the previous month, suggesting a big increase in the central bank’s purchase of government debt.
However, in late August Sun Guofeng, head of monetary policy at the People’s Bank of China (PBoC), insisted that the bank would maintain a ‘normal’ monetary policy and that there was no need for the bank to adopt quantitative easing or zero/negative interest rates.
Liu Guoqiang, vice governor of the PBoC, told the same briefing that there was no need to lower Chinese banks’ capital adequacy ratios. However, in June 2021, the bank raised the foreign-currency requirements of domestic banks from 5% to 7% in response to the yuan’s strengthening against the dollar and the consequent inflation in the price of Chinese exports.
