18 Feb 2015
Falling oil prices provide excellent opportunity to end Fed’s QE – Nomura
FXStreet (Barcelona) - Richard Koo, Chief Economist at Nomura, views that with inflation running low due to falling oil prices, any adverse impact on long-term rates due to Fed ending its QE might be limited, and in fact the slump in oil provides an excellent opportunity to end this QE.
Key Quotes
“At present, the Fed is seeking to raise interest rates before it winds down QE, which would entail a contraction of its balance sheet. The recent decline in oil prices, however, provides an excellent opportunity for the monetary authorities to wind down QE in my view.”
“Because inflation is currently being depressed by the wholly exogenous factor of falling oil prices, any upward pressure on long-term interest rates from an end to the Fed’s policy of reinvesting principal payments will naturally be limited.”
“And if discontinuation of the reinvestment policy causes long-term rates to rise far above levels considered appropriate, an announcement by the Fed that it would extend its existing zero-interest-rate policy (ZIRP) would help curb the increase in long-term rates.”
“A decision by the Fed to extend ZIRP would also be credible with the market given that inflation is so low following the drop in oil prices.”
“While there is no guarantee that oil prices will remain low forever, if the authorities begin winding down QE now and the market grows accustomed to it, any subsequent rise in oil prices and corresponding inflation concerns would be unlikely to spark severe market turmoil given that the normalization of monetary policy would already have begun.”
Key Quotes
“At present, the Fed is seeking to raise interest rates before it winds down QE, which would entail a contraction of its balance sheet. The recent decline in oil prices, however, provides an excellent opportunity for the monetary authorities to wind down QE in my view.”
“Because inflation is currently being depressed by the wholly exogenous factor of falling oil prices, any upward pressure on long-term interest rates from an end to the Fed’s policy of reinvesting principal payments will naturally be limited.”
“And if discontinuation of the reinvestment policy causes long-term rates to rise far above levels considered appropriate, an announcement by the Fed that it would extend its existing zero-interest-rate policy (ZIRP) would help curb the increase in long-term rates.”
“A decision by the Fed to extend ZIRP would also be credible with the market given that inflation is so low following the drop in oil prices.”
“While there is no guarantee that oil prices will remain low forever, if the authorities begin winding down QE now and the market grows accustomed to it, any subsequent rise in oil prices and corresponding inflation concerns would be unlikely to spark severe market turmoil given that the normalization of monetary policy would already have begun.”