There is worse to come as QE loses its impact

For years, central bankers have been reluctant to suggest that unconventional monetary policies even had costs. But while developed markets plunge ever deeper into uncharted financial territory as a result of central bank actions, the drawbacks and the limitations of such policies are finally becoming apparent.

The negative effects will become even more obvious over time. This will occur as asset price inflation -- the main consequence of central bank policies -- goes into reverse, robbing financial engineering of its efficacy and flattening the yield curve.

Suddenly, the success of central bankers in lifting financial asset prices through unconventional monetary policies seems to be coming to an end.

Those policies did little for the real economy on the way up, as most companies engaged more in share buybacks than in investing in capacity, and economic growth in the US, for example, never broke through a range of 2 per cent to 2.5 per cent, falling under 1 per cent in the fourth quarter. The impact on the real economy on the way down will be greater.

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The extent to which quantitative easing is losing effectiveness can be seen best in the drop in the share prices of private equity firms. In the past few years, it is possible to argue that no single group of investors has been as big a beneficiary of QE as these large alternative investment firms. They could finance their deals with cheap debt, sell down their holdings of portfolio companies in stock markets which kept rising, and mark up the value of their privately held portfolio companies on the basis of their listed peers. Now those perfect conditions are going into reverse.

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In an election year in the US, it seems unlikely the Fed will return to its previous pattern of purchasing more securities, given the fact that such policies are partly responsible for deepening income inequality. It is even more risky for the Fed to adopt negative interest rates policy (NIRP) as so many other developed nations now have, given that the impact on huge money market funds is unknown... Meanwhile, JPMorgan late last week predicted that both the Bank of Japan and the ECB are likely to ease more in coming weeks. It is an odd world where the failure of unconventional monetary policies leads to more rather than less of the same. There will be worse to come.