With Janet Yellen firmly in the reigns of the world’s largest central bank, many are looking to the legacy left by her predecessor Ben Bernanke. Love or loathe him, Bernanke undoubtedly pioneered a new style of central banking based on large scale direct market intervention, mainly through policies such as quantitative easing. With the policy now being scaled down, it is useful to ask whether QE and more broadly whether the Federal Reserve has been successful in supporting the US recovery.
With the US debt ceiling talks and the new Chairman of the Federal Reserve (Fed) Janet Yellen dominating the business and economics headlines, the economic woes of the US are back in the spotlight. It reminds us of the sluggish and vulnerable economic recovery that the US is currently facing on the back of ongoing Quantitative Easing (QE) monetary stimulus. Despite the debt standoff and the likely continuation of QE as Yellen leans towards employment over inflation, what is still a looming concern is the eventual exit of the QE program by the Fed. Due to the risks of a disorderly exit, the process is made more complex as timing, pacing and communication all need to be carefully managed, and both implications for the US economy and the potential collateral damage around the world need to be considered.
Hysteresis in the periphery
Recently, financial markets around the world have undergone a sharp correction in response to fears of an eventual tapering in the Federal Reserve’s Quantitative Easing program. The reaction was spurred by Ben Bernake’s, Chairman of the Federal Reserve, comments to the press that QE will be slowed if unemployment falls to 7% and inflation remains within their target. Cautiously this may be sooner than expected as the US economy is beginning to show sustained periods of healthy increases in employment growth.
However, the same cannot be said for the European Union. GDP in countries in the periphery continues to decline, with Italy suffering a 2.4% decline and Greece a 5.6% decline in the first quarter of 2013. Alarmingly it’s Italy’s worst recession in 20 years. With this persistently poor performance, comes the danger of hysteresis.
Last year on December 26th, Shinzo Abe assumed office as Japan’s current Prime Minister and immediately began fulfilling his electoral campaign promises of bringing sweeping economic reform and output growth to the world’s third largest economy. After suffering decades of lacklustre output and many failed attempts to induce growth, Abe’s policies, both currently implemented and in the pipeline, are the biggest things to hit Japan since Godzilla itself.