Quantitative easing (QE) helped reverse the meltdown brought to the global economy by the financial crisis but a decade later there’s a shadow over markets caused by the prospect of a world without the emergency measure.
Central banks unleashed quantitative easing, essentially a money-printing programme implemented through buying vast quantities of bonds, in response to the global financial crisis of 2008. The idea was that the flood of money, combined with historically low interest rates, would help to kickstart the economy and buoy markets.
The Federal Reserve was the first to move in late November 2008; its several rounds of QE ran until October 2014 and resulted in $4.5trn being added to the central bank’s balance sheet. The Bank of England first embarked on QE on 5 March 2009 while European Central Bank and Bank of Japan followed some time later.
Performance of indices over 10yrs (in local currency)
Source: FE Analytics
As reflected in the above chart, QE has been the backdrop to an impressive bull run with led by the US, while the global economy bounced back from the severe downturn that followed the financial crisis. Laith Khalaf, senior analyst at Hargreaves Lansdown, said: “We’ll never know what would have happened without QE, but chances are it would have been pretty dreadful.”
More recently, the conversation around QE has turned to how it can be withdrawn without risking a fresh rout. The challenging market conditions of 2018 were attributed in part to the Federal Reserve’s move to normalise its monetary policy by raising interest rates and shrinking its balance sheet.
But in January the Federal Reserve performed a U-turn on its monetary tightening plans after given a downbeat economic outlook. Fed chair Jerome Powell said the central bank would take a “patient” stance on interest rate hikes and a more cautious approach to reversing QE.
David Jane, manager of the £507.2m LF Miton Cautious Multi Asset fund, noted that the Fed’s willingness to pause its normalisation plans has prompted fresh speculation that central banks are open to restarting QE if the economy starts to stutter. 
This has been seen in the recent past in the UK. In August 2016, the Bank of England responded to the Brexit referendum result by pumping an additional £60bn into the economy (taking its QE total to £435bn) and lowering the base rate from 0.50 per cent to a new record low of 0.25 per cent.
“Having been brought up in the era of traditional monetarism, many commentators suggested that the likely outcome of money printing would be inflation. However, quite the opposite has occurred, and the economy and markets now seem to be stuck in a repeating cycle. Eat, sleep, rave, repeat,” Jane said.
“At each occasion where expansion has appeared threatened, further rounds of QE have been enacted, enabling markets and economies to quickly recover. Central bankers might now be thinking they have superpowers, able to avoid recessions simply by mentioning the possibility of more free money going forward.”
Gross debt as % of GDP
Source: International Monetary Fund
However, the Miton multi-asset manager added that “reality is quite different”. The latest estimates from the IMF put the global debt pile at $182trn at the end of 2017 (a 50 per cent increase on 10 years earlier) but Jane argued there has to be an upper bound to the amount of debt the world economy can sustain and therefore on how much QE can be done.
“The question that will need to be answered in the near term is whether the change in tone from the US Federal Reserve, and the apparent injection of further liquidity from China, will be sufficient to underpin markets over the coming months and revive economic growth expectations, which appear to have taken a material knock lately,” Jane explained.
“If that is the case, then markets can repeat the pattern for yet another round, building on the current recovery into a sustained rebound and further economic growth, putting off a recession for another day.”
At the moment, however, it is unclear whether pushing back tighter monetary has successfully buoyed the economy once more. Because of this, Jane’s multi-asset fund range is avoiding areas which will suffer most in the event of a downturn, while focusing on equities that can “thrive even if a recession looms”; in fixed income, government debt is preferred over corporate bonds.
Over the long term, of course, central banks will have to withdraw QE but it may not be a smooth process for the Fed to restart tightening after its surprise pause this year.
Seema Shah, global investment strategist at Principal Global Investors, said: “It may not be easy for the Fed to resume rate hikes without rising renewed collapsing confidence, throwing markets once again into disarray.
“The equity market rally may have been extended but risk appetite will eventually be challenged again – and while the risk of a recession in 2019 is lower than it was two weeks ago, the risk of a recession in 2020 has now surely increased.”
Nor will the process of draining QE from the financial system be a quick one. Hargreaves Lansdown’s Khalaf concluded that the lacklustre economic picture means we could see more QE launched before the real work of removing it from the system can begin.
“We shouldn’t expect QE to disappear quickly, he said. “Monetary policy may yet have to loosen again to fend off a slowdown before it tightens sufficiently to eliminate QE. It would not be too surprising to find some QE still swimming around the system in five or even 10 years’ time.”