US Reduction of Quantitative Easing: Strive To Normalize Risk Assessment

A switchover from monetary policies introduced as an emergency response to the COVID-19 crisis is underway. After November, the U.S. Federal Reserve will gradually begin to curtail monetary quantitative easing measures through which it had been injecting large amounts of money into the market.

In the U.S., the business climate quickly recovered as economic activity resumed. Recently, if anything, prices continue to rise, as supply fails to keep up with soaring demand.

The decision to phase out the monetary easement is reasonable, based on such economic trends. In contrast, Japan cannot help but continue its large-scale economic easement, as economic recovery is slow and concerns about deflation remain.

However, the board’s change in policy will have a worldwide influence, so caution is necessary. In the U.S., If the trend toward buying the U.S. dollar in anticipation of increasing interest rates gains strength, there is concern that capital will flow out of developing nations, devaluing their currencies.

Japan is not immune from the situation. If the price of imports increases, accelerating the strengthening of the dollar and the weakening of the yen, then that change coupled with the high cost of crude oil could deal a devastating blow to the economic climate, which is already slow to recover.

We hope that the Fed will work to normalize its monetary policies, while being careful to avoid ushering in worldwide chaos. We would like to see thorough consideration given to the pace of this move to curb quantitative easing, of course, as well as a focus on the rising interest rates and the foreign and domestic economic climate.

Last March, the board introduced two measures: a quantitative easing policy, meant to buy U.S. Treasury securities and inject capital into the market, and an effective 0% interest rate policy. It was an extraordinary large-scale relief move meant to support an economy hobbled by the COVID-19 crisis.

The decision was made to gradually reduce the amount of asset purchases, which had been $120 billion a month, or roughly 13.7 trillion yen. If the economic recovery continues at a good pace, then by the midpoint of next year, the purchases will cease.

One more 0% interest policy rate will remain in place in the meantime. Some might judge that the move toward tightening credit to lift this measure and raise interest rates is premature, but the board will soon have to make a difficult decision about when to raise the rates.

The board must not be too slow to raise interest rates and hasten inflation, but at the same time, it must also not move in haste and plunge the market into a relapse. The U.S. is facing high commodity prices, in part because of supply chain limitations due to logistical stagnation resulting from COVID-19, as well as difficulties in procuring materials. It is necessary to carefully examine how long this situation can drag out. We hope that Fed Chair Jerome Powell will strive to continue to thoroughly communicate information to the market, taking all of these points into account.