Watching the Central Banks

Central Banks across the industrialized world have responded aggressively to the global financial crisis that began in mid-2007 and that, in many ways, still remains with us today. Generally, central banks responded to this recession by applying quantitative easing (QE) programs. Quantitative easing can be applied in different forms. This is a general definition of QE:

An unconventional monetary policy in which a central bank purchases government securities or other securities from the market in order to lower interest rates and increase the money supply. Quantitative easing increases the money supply by flooding financial institutions with capital in an effort to promote increased lending and liquidity.

In order to kick-start its economy, Japan is undertaking radical measures in pursuit of growth. Although the ECB has clearly taken a less accommodative policy than most other central banks, its total asset holdings are still larger than the Fed’s. This can be explained by the fact that it started from a higher base. Since 2008 the Federal Reserve tripled the size of its balance sheet.

QE actions taken by the Fed

Each time the Fed stopped a quantitative easing program, the markets tumbled. With American indices at record highs recently, the fundamental question remains:

“Will the American economy generate enough robust growth to outlive the rather addictive liquidity stimulus it has been used to for the last couple of years?”

Whether the recent growth of the United States is indeed fundamentally strong enough remains debatable. Most likely, though, it will lead to a shift in capital flows. As money is not as easily available as it has been the last few years, growth stocks suddenly seem more vulnerable. Value stocks are expected to prosper the most. As has been stated earlier, remember, stock markets adore quantitative easing.


  1. Money Morning
  2. ForexLive
  3. Reuters
  4. Fractional Flow

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Ivo Furda

Main interests of Furda are macro­economic developments and trends.

This article provides opinions and information, but does not contain recommendations or personal investment advice to any specific person for any particular purpose. Do your own research or obtain suitable personal advice. You are responsible for your own investment decisions.

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