To be sure, the idea of “QE infinity” has been around for quite some time.

Once it became clear that the globalization of unconventional monetary policy had, for all intents and purposes, served to elevate central bank stimulus above economic variables and common sense in the eyes of market participants, it began to look as though withdrawing that stimulus might well prove to be impossible without triggering an outright meltdown in capital markets. 

Still, the assumption was that eventually, trillions in global QE and seven years of ZIRP would conspire to resuscitate global demand and trade at which point the central banks of the world would ever so gradually begin to roll back stimulus. 

Only that’s not what happened.

Instead, global trade has remained in the doldrums and the unprecedented effort to keep capital markets accommodative has actually contributed to a worldwide deflationary supply glut. That, in turn, has hit commodity currencies especially hard, pushing emerging markets to the brink. China’s move to join the global currency wars muddied the waters even further and once the Fed admitted that in the current environment, it’s impossible not to be market dependent, QE4 essentially became inevitable.

In short, if the Fed hikes to telegraph its confidence in the US economy, EM will careen into crisis and that will feed back into advanced economies forcing the FOMC to reverse course. If the Fed remains on hold in an effort to avoid triggering more EM outflows, DM risk will sell off as market participants interpret a dovish FOMC as indicative of a worsening outlook for US economic growth and inflation expectations. And then there is of course the possibility that by keeping the world in suspense, the Fed is contributing to the uncertainty that plagues emerging economies and that keeps investors on edge.

Between this and the fact that global demand and trade appear to be grinding to a halt (just ask the WTO, the OECD, and the ADB who have all voiced their concerns in the past two weeks), the only way out for the Fed appears to be a return to QE which would simultaneously (albeit temporarily) i) realign Fed policy with the ECB and BoJ, ii) provide a bid for domestic risk assets, and iii) send the “right” message to EM regarding the FOMC’s concern for keeping the situation from deteriorating further. 

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