The Federal Reserve’s addiction to quantitative easing may yet result in a further round of the monetary policy measure as soon as this time next year, experts have said.
The US implemented a raft of unconventional policies to prop up its economy in the wake of the financial crisis under former Federal Reserve chairman Ben Bernanke.
These measures were then adopted by current chairwoman Janet Yellen, but came to an end last October after a massive $4.5trn (£2.9trn) had been spent in the previous five years buying up bonds.
But experts now predict that the US could revisit the policy if the economy does not perform as hoped.
Anton Eser, co-head of global fixed income at Legal & General Investment Management (LGIM), said a fourth round of easing was “quite possible in the coming years” given the long-term growth concerns.
Tilney Bestinvest chief investment officer Gareth Lewis agreed there was “a risk that this time next year we will be wondering if the Federal Reserve will be starting quantitative easing”.
US economic growth disappointed at the beginning of this year. Economists had predicted a strong start to 2015, but the US contracted by 0.2 per cent in the first quarter.
Delving into the GDP data throws up more concerns. The previously booming energy sector slowed down drastically and business investment had its worst reading since 2009, growing by just 2 per cent, recent data shows.
However, the Federal Reserve’s language suggested it was still preparing to raise its interest rate sometime this year.
Market participants are predicting a 0.25 per cent rate increase in September, with another in December.
However, Mr Eser is concerned about the impact given the lacklustre GDP growth backdrop.
He said: “There is a worry a handful of rate hikes will be enough to slow the economy to such an extent that the Federal Reserve pauses and even considers reversing policy.”
What the US economy needed was wage inflation, Mr Eser said.
But Mr Lewis said that this was unlikely to occur anytime soon, because while jobs were being created, they were mostly low-skilled ones in low-paid industries.
The predictions by Mr Lewis and Mr Eser come just months after Investment Adviser reported what was then a counter-intuitive call by BNY Mellon global strategist Peter Hensman, who said quantitative easing was “as likely as a rate rise”.
Part of the rationale for this view was the contraction in the levels of yield offered by fixed rate bonds and by inflation-linked bonds, known as the break-even inflation rate.
Economists at LGIM had found the break-even inflation rate on five-year bonds – calculated by looking at the yields of five-year fixed rate bonds and five-year inflation-linked bonds – was 1.2 per cent at the end of December.
This was lower than the 1.4 per cent rate that led the Federal Reserve to start its second round of support for the economy.
Mr Lewis said if the central bank did restart quantitative easing, he would seek out investment in gold, given further easing could weaken the dollar and would probably mean economic growth was weak.