Doha: The US Federal Reserve (Fed) decided in its latest meeting on Wednesday to draw the curtains on one of the most remarkable experiments of monetary policy. By stopping its monthly purchases of assets from November — which have been ongoing for over two years — the Fed has put an end to its quantitative easing (QE) programme. By all accounts, QE was a big and bold move. However, what impact it had on the US and the world economy remains a controversial issue, something that will be researched for years to come, said QNB Group in its weekly analysis yesterday.
The outcome on the US economy was indeed positive. The US avoided going through a prolonged period of deflation altogether. The unemployment rate, which peaked at 10 percent in October 2009 has been falling steadily since then and now stands at 5.9 percent.
The impact of the Fed QE on the global economy was no less significant. The search for yield extended not only to domestic equity, credit and housing markets but also to Emerging Markets (EMs) bonds and equities. These flows provided a boost to these assets offsetting large current account deficits in some EMs. However, when the Fed indicated its intention to reduce its monthly asset purchases in May 2013, the portfolio flows quickly reversed, exposing the weaknesses in some of these economies. Particularly hurt were the so-called Fragile Five countries (Brazil, India, Indonesia, South Africa and Turkey), which suffered from large depreciation in their currencies following large capital outflows.
The GCC was relatively immune from the EM turmoil which followed the tapering tantrum. The International Monetary Fund has recently estimated that the cumulative portfolio outflows since May 2013 were less than 0.1 percent of GDP in the GCC — much lower than the rest of EMs, which have been estimated at 0.35 percent of GDP. Two reasons contributed to the favourable performance of the GCC economies.
First, they are less open than other EMs, and therefore less exposed to swings in investor sentiment. Second, the region’s strong external position and large current account surpluses have led investors to view them more favourably than other EMs.
For better or worse, the Fed’s experiment with QE is over. Markets have turned their attention to the date of the first rate hike by the Fed. The Fed’s most recent statement indicated that it is likely to maintain the policy rate at its current level for “a considerable time” following the end of QE. Markets expect the first rate hike to take place in the second half of 2015, the report said.
The Peninsula
