Has Quantitative Easing Lost the Ability to Boost Markets?

The purpose of QE is to support or push the prices of assets higher, but the Bank of Japan and European Central Bank have recently favoured the effect of negative interest rates

External Writer 13 April, 2016 | 8:21AM
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Morningstar's "Perspectives" series features investment insights from third-party contributors. Here, James Klempster, head of Portfolio Management for Momentum asks, has quantitative easing become a victim of its own success?

While it had been used before, Quantitative Easing (QE) really only came into our collective consciousness when the US Federal Reserve used it following the global financial crisis. The purpose of QE is to firstly support or push the prices of assets higher, which in turn results in an enhanced feeling of wealth for the holders of those assets and secondly, because many of the purchased assets were fixed income securities, QE served to pull down interest rates.

This rendered low risk fixed income assets unattractive in terms of their total returns, which pushed investors into riskier assets in search for better yields. QE is now a cornerstone of central bank extraordinary monetary policy, and has been used to great effect. Yet recent activity by the Bank of Japan and European Central Bank (ECB) has placed increasing reliance on negative interest rates rather than relying solely on tried and tested QE. 

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