Investors
P: 1800 658 404
View full details
Financial advisers
Contact your state account manager or our client services.
View full details
Shopping Centres
For leasing, casual leasing and brand solutions enquiries
Contact Us
Connect with us to stay up to date with news and updates.

LinkedIn

Goodbye QE, hello QT

Market watchers and investment professionals alike see the Fed’s announcement as a pivotal time for global financial markets since the actions taken by central banks in the wake of the 2008 crisis.



It was a mere few years ago when talk of the end of Quantitative Easing (QE) sent a shudder through global financial markets which became known at the time as the “Taper Tantrum”.

How times have changed.

Now, days since the US Federal Reserve confirmed it will start reducing its balance sheet by not reinvesting in bonds up to set limits as they mature, share markets have continued to remain resilient; the global S&P500 index even finished the day higher following the Fed announcement higher after dropping during the day. 

The reality is, QE has done its job: the US economy is growing of its own volition and earnings are being supported by “fundamentals.”   

“That quantitative easing in the US can now start to be reversed is very good news – basically it’s done its job in helping get the US economy back on track after the Global Financial Crisis,” Dr Shane Oliver, AMP Capital Head of Investment Strategy and Chief Economist, says.

The Fed’s decision to start reducing its balance sheet by not reinvesting bonds like it has been doing amounts to Quantitative Tightening (QT) as it will start to reverse some of the quantitative easing that occurred during and after the GFC, Oliver highlights in his latest Oliver Insights note.

The US Fed’s plan is to reduce its balance sheet not by selling bonds, but by slowing the reinvestment of maturing bonds. 

This process will start at a maximum cap of $US6 billion a month for Treasury bonds and $US4 billion a month for mortgage-backed securities in the December quarter, increasing over 12 months until it reaches $US30bn a month for Treasury bonds and $US20 billion a month for mortgage-backed securities in December quarter 2018, Oliver explains.

No surprise


“While well flagged and so no surprise, the Fed’s move to start balance sheet normalisation is a momentous shift and tells us just how much stronger the US economy has become in recent years,” Oliver notes. 

Indeed, it’s unlikely the US Fed will go back on its decision to start shrinking its $US4.5 trillion balance sheet. 

At a press conference following the US Central Bank’s two-day policy meeting this week, Fed chief Janet Yellen said the hurdle for reversing the plan was "in some sense high", and that only a significant shock and a "material deterioration" in economic conditions would cause the officials to change tack. 

Market watchers and investment professionals alike see the Fed’s announcement as a pivotal time for global financial markets since the actions taken by central banks in the wake of the 2008 crisis.

Bond buying through the Fed’s QE1, QE2 and QE3 programs was designed to inject liquidity back into financial markets which were paralysed following the collapse of Lehman Brothers and other organisation when systemically important financial institutions were teetering on the edge of collapse and threatening widespread financial contagion.

Today, global share markets are pushing up against all-time highs, spurred on by cheap corporate funding and demand from investors to push out along the risk curve for income producing investments while cash and fixed income yields remain low.  

Still resilient


Shares should be able to withstand the latest leg in Fed tightening just as they have since the end of the 2014 leg of QE and the four rate hikes the Fed has undertaken since, Oliver notes. 

“Shares are still cheap relative to bonds; the Fed is only tightening because growth is strong and this means higher profits; and Fed monetary policy is a long way from being tight to the extent that it will threaten US or global growth,” he says.

The ongoing monetary tightening in the US with gradually rising official interest rates and now a gradual reduction in the supply of US dollars through quantitative tightening should help boost the US dollar after its fall so far this year at a time when sentiment toward it is poor. 

A rising US dollar should in turn help reduce the rising pressure on the value of the Australian dollar, which in turn should be welcome news for the Reserve Bank of Australia, which would prefer to see a lower local currency.   
Funds related to this article: Dynamic Markets Fund

Navigating the ups and downs of the market cycle. This fund uses dynamic asset allocation to actively adjust the split of investments across asset classes to achieve diversification in response to market changes.

The Fund aims to achieve growth above inflation1 and smooth out the economic cycle over a rolling 5 year basis.

1Consumer Price Index (CPI) - the Reserve Bank of Australia inflation rate, trimmed mean

Find out more
Taking your SMSF to the next level
Download free ebook

Sign up to our newsletter!

Receive regular insights and marketing communications including a weekly update of trending news and market insights that are tailored for SMSF trustees and investors.
AMP's Australian operations are bound by the current Australian privacy legislation which outlines how organisations should manage and use personal information collected and held about their customers. AMP Privacy Policy
Sign me up Not right now. Thanks

Sign up to our newsletter!

Receive regular insights and marketing communications including a weekly update of tending news and market insights that are tailored for SMSF trustees and investors.
AMP's Australian operations are bound by the current Australian privacy legislation which outlines how organisations should manage and use personal information collected and held about their customers. AMP Privacy Policy
Sign me up