The recent financial turmoil already is fueling speculation about a fourth round of quantitative easing by the Federal Reserve, which would again step in to buy financial assets, boosting prices and repressing volatility. This wishful thinking is unsurprising for markets that have been conditioned to view central banks as their best friend. Yet the Fed is unlikely to oblige any time soon, nor should it.
With policy interest rates floored at zero in recent years, the Fed has used its balance sheet to normalize financial markets and pursue its dual mandate of promoting employment and stable inflation.
The first round, QE1, during the global financial crisis, was aimed at repairing a highly dysfunctional financial intermediation system. QE2, in 2010, was intended to stimulate economic activity. The Fed resorted to additional stimulus, including its QE3 program, as the economy then languished in a low growth, “new normal” equilibrium.
Despite a few hiccups and disappointing economic growth, this string of so-called unconventional monetary measures succeeded in lifting asset prices and kept market volatility in check, turning central banks into close allies of the markets. It was to be expected that the recent vertiginous plunge in equities and other risk assets, along with a spike in volatility, would lead to predictions that a new set of measures was in the offing.
Here are four reasons this is unlikely to happen any time soon, if ever.