So far, however, there is simply not as much historical evidence availab le about the impact of QT, because we have observed more episodes of balance sheet expansion than of balance sheet contraction. A number of considerations support a prudent approach, since the response to QT could be stronger than the response to QE. First, the fiscal landscape has deteriorated in recent years. Public debt to output ratios have climbed sharply since the onset of the pandemic, because governments have run very large deficits over the course of the pandemic and because output has fallen. The current inflation surprise somewhat reduces the real value of this debt, but this effect is small compared with the strong increase in debt levels since the pandemic began. The greater the amount of debt that private markets must absorb, the lower the liquidity in sovereign debt markets and the higher the yields that markets will demand in order to equate supply with demand. Accordingly, this factor tends to magnify the impact of quantitative tightening on the term premium11. Second, the impact of balance sheet policies may also vary depending on liquidity conditions. In QE times, more liquidity injected into the system did not have a major impact since the market was saturated with excess cash and thus money market conditions were rather insensitive to additional liquidity injections.
As regards the Federal Reserve, although it is true to say that under the present regime chosen for our monetary policy – namely a currency board with the US dollar as anchor currency – the Fed's monetary policy has a major and direct influence on monetary conditions in Hong Kong, it was certainly not the Fed which determined that Hong Kong should operate a monetary policy of this nature. It was Hong Kong's choice, and we do not require any permission from Washington or New York to continue or discontinue it. With regard to the Legislative Council, while members of LegCo take a keen interest in monetary policy and related issues, and although the HKMA maintains a dialogue with LegCo, more particularly with its Financial Affairs Panel, over matters of common interest, LegCo has no locus under existing laws to determine monetary policy. With regard to the three note-issuing banks, that particular status confers no ability to affect monetary policy. The banks issue notes in response to the public's wishes to exchange deposits into currency, and are required to pay over backing to the Exchange Fund in such manner as the Financial Secretary specifies - which has since 1983 been the equivalent value in US dollars calculated at the fixed rate of 7.80. Within this framework the volume of note issuance itself is neutral in terms of monetary policy.