From HSBC’s Steven Major:
The six stages of G4 QE: Fed not even at stage 2 yet Tapering, if it were to start, would be stage 2. As stage 1 represents the initial buying of assets by the central bank, the next stage is about adjusting the speed of purchases. If QE is a car, then the accelerator (gas pedal) was pushed in late 2008 (see Figure 3) and it was the rate of change that mattered. When taking the foot off the accelerator, the car naturally slows down: so it is with QE. We should not confuse slowing down with going into reverse…
The Bank of England and ECB are at stages 3 and 4 respectively. Following the car analogy, both have slowed to a stop – ie they are no longer making new purchases – but there are important differences. Having bought GBP375bn gilts the BoE is actually maintaining its position by reinvesting the coupons and redemptions as they come in (see Figure 4) and provide a taper example from 2009. This is akin to holding the car on the clutch, which makes it fairly easy to move forward or backwards. The ECB is currently moving backwards, at stage 4, but this does not exclude the possibility of a new round of easing, which would take the process back to stage 1….
No G4 central bank is anywhere near stage 5 or 6 The ECB’s position is still not to be confused with an exit strategy and, stretching the car analogy, this would be like rolling back down the hill to where you started, slipping the clutch that was being held in stage 3. A stage 5 exit would mean putting this car into reverse and to a central bank this would mean decisively reducing the size of the balance sheet by selling assets and letting the level of reserves in the banking system return to a more normal level. No central bank is currently doing this and in our opinion it remains a long way off, maybe something for the next decade. Economic growth levels remain too low in the G4 countries and the outlook for the recovery is fragile. These would be enough reason to maintain the stimulation but falling inflation and a growing risk of deflation argue for maintaining the stimulus for longer