The asset classes most at risk of a QE-led bubble
The unwinding of the biggest financial experiment in modern history is gaining momentum, but experts say this offers little to cheer about.
Since 2008, the Federal Reserve and the Bank of England have been buying financial assets – mostly Treasuries, gilts and corporate debt – in a bid to shore up the economy from contraction.
The gradual removal of quantitative easing by the Fed since the beginning of the year has generally been regarded as a return to the norm, spelling the end of six years of financial crisis.
However Eric Chaney, head of research at AXA Investment Management and chief economist at the AXA Group, believes that QE could still have a number of unintended consequences for investors.
He is not convinced that it has worked in the way it was supposed to and says that anyone who is celebrating its withdrawal is being naive.
“Monetary policy is supposed to work by stimulating demand and raising output, but if ‘low-flation’ has structural causes, such as the shape of the wage distribution curve rather than a lack of aggregate demand, then the risk is that liquidity injections may inflate asset prices instead of real demand,” he said.
“Three possible candidates for bubbles are high yield bonds in the US, peripheral bonds in the eurozone and housing in the UK.”