The Federal Reserve’s eventual unwinding of unprecedented monetary-easing policies has the potential to be a so-called black swan event that could roil global financial markets, according to Mitsubishi UFJ Financial Group Inc.’s Brendan Brown.
“The most likely way it will end is going to be through some sort of eventual equity-market crash, a return to a Roosevelt-type recession and popular revulsion led in the political process against the whole history of Federal Reserve monetary management,” Brown, chief economist at Mitsubishi UFJ Securities, said Tuesday at the Bloomberg Link FX12 Summit at Bloomberg’s European Headquarters in London.
Fed Chairman Ben S. Bernanke announced last month that the U.S. central bank would likely keep rates at a record low and purchase $40 billion of mortgage bonds per month in a third round of what’s become known as quantitative easing, or QE3, until employment shows “sustained improvement.” The Fed added $2.3 trillion to the financial system during the first two rounds of QE between December 2008 and March 2010, and from November 2010 through June 2011.
One possible scenario for the U.S. economy is that the presidential election results will give a “fill-up” to the equity markets and blur concern that $600 billion in mandated spending cuts and tax increases starting Jan. 1 if Congress can’t agree by Dec. 31 on ways to reduce the deficit will lead to recession, Brown said.
Black Swan
In that case, “it’s pretty difficult to imagine why you’re going to get QE4,” Brown said. “There is a definite scenario there that we don’t go on to QE5 or QE6.”
The term “black swan” was popularized in a 2007 book by Nassim Nicholas Taleb, author and investor. It’s a metaphor for an unforeseen catastrophe and derives from the once widespread belief that all swans were white, until European explorers discovered black swans in Australia.
“In the QE space, there is likely no logical end point,” Geoff Kendrick, head of European currency strategy at Nomura International Plc in London, said at the summit. He described his own view as optimistic.
“Although it’s never been done before, it is very possible that at some point the economy picks up, they stop QE in any form and then you start seeing a natural roll off,” Kendrick said. “At some point the Fed starts printing bills, and therefore you see a gradual run off of the balance sheet just in time for the economy to start picking up. A lot of ifs in there of course, but I think it’s still possible.”
Robert Savage, chief executive officer and co-founder of Track.com, said that QE3 would end badly. “I don’t imagine that we don’t survive this without a massive high-yield collapse as the spreads between value have been lost.”
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