For investors, the implementation of quantitative easing (QE) has had many benefits, but the withdrawal of this extraordinary monetary support is likely to result in some negative effects such as market volatility. However, while investors should be aware of the potential outcomes, the unwinding process will not be fast or easy for any of the world's central banks.
QE is a form of monetary policy that involves central banks purchasing securities to increase the money supply and encourage economic activity. It first reared its head in 2001 when the Bank of Japan (BoJ) found itself backed into a corner: it needed to stimulate the economy, but it couldn't lower nominal interest rates any further. So the BoJ became the first central bank to purchase government bonds, financed by creating central bank reserves. Following the global financial crisis, central banks in the U.S., U.K. and Europe followed suit, pumping large amounts of money into the banking system to prevent it from collapsing.
It's been a decade since the start of the crisis, and it's time to think about what happens next. Despite a fairly uniform decision to undertake QE across developed markets, the methods have differed and so will the approaches to unwinding it. Let's consider the likely next steps of central banks around the world.