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Jamie Dimon, chairman and chief executive officer of J.P. Morgan Chase, said Monday that one of the biggest risks to the U.S. economy is the reversal of the extraordinary measures central banks took to avert disaster after the financial crisis.
Starting about a decade ago, the Federal Reserve and other central banks began to purchase trillions of dollars of government bonds and other securities to inject money into the financial system, a move called "quantitative easing" that was coupled with slashed interest rates. In the U.S. alone, the Fed's balance sheet ballooned to $4.5 trillion from $800 billion as a result of QE.
Now, after more than $12 trillion was pumped into the global system, the U.S. central bank signaled in September that it would begin to unwind the trade. The Fed has already begun by letting $40 billion of its bonds mature each month without replacing them, and other central banks have signaled they will also follow, a process dubbed "quantitative tightening."
Dimon said Monday that the unwinding of the unprecedented program could backfire on the economy or spark a market panic. Potentially adding to the problem are new limitations on banks' capital and trading activities, meaning swings in asset prices could be sharper than in the past, Dimon said in an April letter to investors. A related danger would be if the Fed is forced to raise rates faster than expected because of higher inflation, he said.
Here are other views on the potential impact of quantitative tightening:
Larry Summers, former Treasury Secretary:
"The assumption manifest in the statements of the Fed and most commentary is that policy should be tightened over time through rising interest rates and a reversal of quantitative easing. Perhaps, but tightening involves real dangers and needs to be carried out with great care.
"The Fed has committed itself to a symmetric 2 percent inflation target and inflation has been below 2 percent for eight years. If a booming economy in the ninth year of recovery with this prelude is not the time for inflation above 2 per cent, when would such a time arise?"
Peter Boockvar, chief investment officer of Bleakley Advisory Group, a $3.5 billion wealth management firm:
"I believe the market – with the S&P at an all-time high - is headed for a brick wall the deeper quantitative tightening gets. I'll say this, if the Fed pulls off QT along with more rate hikes in coming years, a soft landing is achieved and the stock market just keeps on keeping on, I will scream from some mountain top (not too high because I'm afraid of heights) that I was dead wrong."
Ray Dalio, founder of hedge fund Bridgewater Associates:
"The powers of central banks to reverse contractions are more limited than they have ever been (because interest rates are so low and quantitative easing is less effective). For these reasons, I worry about what the next economic downturn will be like, though it is unlikely to come soon."
Bank of America Merill Lynch:
"Quantitative easing was mostly characterized as an environment with too much money chasing too few bonds, lower interest rates, tighter credit spreads and volatility was suppressed. There is no doubt that quantitative tightening at times will lead to the opposite -- i.e. higher interest rates, wider credit spreads and very volatile market conditions."
"The impact of such a large turnaround in central bank purchases on global financial markets is likely to be significant, despite it being widely anticipated and despite the smooth progress seen with the Fed's balance sheet reduction since last October. Private sector investors will be called upon to absorb a much greater net supply of government debt in the coming years as central banks reduce holdings and government financing needs persist in Europe and Japan and rise sharply in the US."