QE lives on...
A pause, but not an end.
If the Bank of England's Monetary Policy Committee today decides not to inject any more money into the economy this month, many will say that the experiment with quantitative easing is at an end. Or at least that it is on pause.
But that won't be the Bank's view. For them, QE has barely begun. And for the policy to work, it's quite important that we think they're right.
Confused? Go back to the basic idea of QE. As I've discussed before (see my earlier posts QED and Does size matter?), what the Bank thinks is important is how much money is created under the policy, not how long they spend creating it, by actually buying assets.
That's one reason the MPC has authorised the Bank to spend £125bn - or nearly 9% of GDP - in just five months.
If they thought that it was the steady drip-feed of asset purchases that mattered, they might well have spread the same amount of "quantitative easing" over a longer time.
They moved more quickly, because they thought the key was to get that dollop of new money into the system.
Has it worked?
Once again, we may never know for certain, but it's certainly too soon to say now. It depends on where you expected QE to do its work - and what you think might have happened without it.
According to the Bank's own explanatory pamphlet on QE (a page-turner if ever there were one):
"[U]ltimately, what matters is the degree to which the cash injection boosts the growth of money and spending by households and businesses and so helps to ensure that inflation is close to target".
Where might such an effect first show up?
The Bank has suggested that the place to look is the quarterly figures for broad money growth (M4) - adjusted to strip out distorting transactions within the financial sector.
As it happens, the latest data, for the second quarter, were released on 4 August.
The new numbers were more encouraging than the previous monthly figures had been: at least they showed the broad money supply growing faster than in the first three months of this year, when the outlook for the banking system and the economy was so bleak.
But not much faster: it grew at an annualised rate of 3.7%, up from 3.3% in the first quarter.
Now, the policy could be helping the economy in ways that don't (yet) show up in M4: for example, if corporate borrowing rates had come down in the private bond markets.
Or if the institutions selling all those billions of government bonds (gilts) to the Bank of England used the cash they got to buy debt or shares issued by the banks.
In the latter case, the new cash wouldn't show up in M4 any more, but it would be good news for the banks.
Bank officials have offered these and other explanations for the continued weakness of the broad money figures.
But, by their own arguments, for QE to work, the money has to show up in M4 sooner or later.
That fall in borrowing rates (or corporate bond yields) needs to actually encourage companies to borrow more, and the banks need to see that improvement in their balance sheets as a reason to lend more.
Indeed, the latest report of the Monetary Policy Forum, created by Fathom Consulting, argues that:
"[T]he real measure of success is not whether QE has managed to increase broad money growth one for one [ie by the full £125bn], but rather whether it has brought forward new lending to, or deposits from the private sector. In other words, whether the money multiplier is not one, but two or three. That would imply that for every £1 created by the BoE, another £2-3 would be created by the banking sector and lent out. That is patently not the case."
You have to sympathise with the MPC. It's plausible that the effects of the policy will take time to show through.
In that sense, it is quite reasonable to announce a pause after this meeting - or perhaps, spend the remaining £25bn authorised by the chancellor over a longer period of time.
But the Bank's policymakers also know that if they decide, say, in December, that the economy needs more than £125bn (or £150bn), they will probably wish they had expanded the policy now. Such is life for the MPC.
What is most important - through all the uncertainty - is that everyone understands what they're doing.
In the past I've talked about various technical "channels" through which QE might help the economy.
But arguably, the single most important channel is also the most nebulous: its effect on confidence.
Back in March, the most important thing about QE was that it was something the Bank could do after it had run out of room to cut interest rates.
The simple assurance that the central bank had more tools in its toolkit sent a powerful message, at a critical time for the financial markets. You don't want your central bank to tell you it has nothing left it can do.
It's possible that QE will never have more impact than on the day it was announced.
That doesn't mean the money itself won't have an impact. It does make it that much more important that the MPC today explains very clearly what it is, and what it is not doing - and why.