The US Federal Reserve has announced another round of bond-buying – known as “quantitative easing”, or QE – to begin immediately, in order to stimulate the US economy and end mass unemployment. Previous similar rounds of expansion of their own balance sheets by the big Western central banks have had noticeable effects.
They are most starkly visible, perhaps, in the case of the Bank of England’s QE, which was undertaken starting in March 2009. Observe, in Table 1, how both the FTSE stock index and yields on government and corporate bonds were tracking steadily downwards till March 2009 and then tracked upwards till easing lost steam, giving the graph a “v” shape.
The effect of QE on stock indices is fairly clear. In Table 2, for example, it is clear how the S&P 500, in the periods between bond-buying, collapses downwards as if seeking its true level. The Sensex, like other emerging-market indices, is not immune to the effects either, with sharp increases visible after quantitative easing comes into effect.(Click here for tables)
Most worrisome for many is the effect on commodity prices. In Table 3, it is clear that oil decreased in price between the various iterations of quantitative easing, and took off again when the bond-buying was restarted. This has problematic implications for the Indian economy and fisc. It is less clear what the impact is on gold, in Table 4 or iron ore, in Table 7. Mumbai real estate, in Table 5, noticeably recovered from its long post-Lehman decline only when QE-2 hit asset prices, in September 2010. By contrast in wheat – Table 6 – prices seem to have, interestingly tracked up in each case just in advance of QE’s impact elsewhere. Most puzzingly, Table 8 shows that foreign institutional investment does not seem to correlate with quantitative easing at all.
