Panel
Central Banks: Is Quantitative Easing Becoming Quantitative Exhaustion?
Milken InstituteJames McCaughan, Cliff Noreen, Tad Rivelle, Aram Shishmanian, Kevin Warsh, David Zervos, Jim McLaughlin
- The Federal Reserve may declare victory on monetary policy if the unemployment rate reaches 6.5%, a target associated with maintaining extremely low interest rates for approximately 9 to 12 months before potential hikes, though some analysts anticipate rates rising only after a two- to three-year horizon.
- Corporate profits are projected to exceed the previous peak of $1.6 trillion by roughly $0.75 trillion, representing a 10% increase despite only 1.6% economic growth since Q1 2009, while real inflation rates are currently estimated at negative 2%.
- Economic growth is expected to remain sluggish at approximately 2% annually with chronic unemployment persisting over the next several years, leading to a scenario where the U.S. economy fails to break out to the upside and becomes "far less promising" than previous decades.
- Global central banks are forecast to increase their balance sheets from $6 trillion to nearly $16 trillion by purchasing or funding $10 trillion in securities over the next five to six years, driving a potential shift toward a "secular and structural" deglobalization wave if policies do not improve.
- Asset markets face specific risks including a potential doubling of real estate prices in cities like Phoenix, Silicon Valley, San Francisco, and Los Angeles before the 6.5% unemployment target is met, which could trigger an "endogenous collapse," alongside warnings of widening spreads and rising rates if quantitative easing ends poorly.
- Monetary policy alone is deemed insufficient to resolve global economic issues, as the U.S. faces structural competitiveness problems with a "wrong configuration" of labor and capital, while aging populations in Japan face decimated wealth and reduced retirement income under current trajectories.
- Fiscal and structural policy adjustments regarding trade, taxes, spending, and regulation are identified as necessary but currently absent due to political gridlock in the U.S. and Europe, with a prediction that the Fed's attempt to force a robust recovery through monetary stimulus will not succeed and risks institutional credibility.
- Fixed-income investors are advised to reduce exposure to traditional duration risk over a two- to three-year view and consider non-traditional assets like private placement debt and commercial mortgage loans due to limited returns in standard products.