To contain these risks, the SNB took unprecedented measures, first increasing liquidity to historically unparalleled levels, then introducing a minimum exchange rate against the euro. 4  Estimates suggest that the first round of US quantitative easing has reduced yields on 10-year U.S. treasuries by 50 to 100 basis points, see e.g. Christensen and Rudebusch (2012) or Gagnon et al (2011). However, we are not yet in a position to undertake a final assessment of the broader macroeconomic effects of these programmes. BIS central bankers’ speeches  3  Summing up our investigation into the causes of low interest rates, the main message is that interest rates reflect the prevailing economic and financial circumstances and the reaction of monetary policy to these circumstances. The low levels we currently observe can be explained by a secular downward trend that began in the 1980s, a cyclical downturn due to the financial crisis, the correspondingly accommodative monetary policy and, in the case of Switzerland, additional downward pressure resulting from the safe-haven demand. But – and this brings me to my next point – such low interest rate levels are not without risk. Consequences of a long period of low interest rates An extended period of very accommodative monetary policy, even when fully justified as a reaction to prevailing economic circumstances, is not without risks and side-effects. Let me raise two issues: the risk to price stability, and the risk to financial stability. I will start with the former.
This partly explains the feeble economic recovery and declining potential GDP growth trend in the US (Chart 2). 6. The weak recovery in the US in recent years fell outside the expectations of many economists at the Fed. Because of the lacklustre growth, QE was extended and expanded, feeding an addiction from “low for long”, to “low for longer” and then to “low forever”, and developing a dependence on QE by the market. When the then Fed Chairman Ben Bernanke hinted at the possibility of scaling down the asset purchase programme in May 2013, the market panicked in an episode we later called the “Taper Tantrum”. 7. So, why is the present recovery weaker than in previous cycles? This is a complicated and controversial subject. I believe that both cyclical factors and structural factors, such as household de-leveraging, the high home inventory levels after the bursting of the housing bubble and structural changes in the population and labour market, are at play. BIS central bankers’ speeches  1  External factors are also involved, including the European sovereign debt crisis in 2011. However, due to time constraints, I will focus on how QE may have supported US economic recovery and affected the global financial environment. 8. The prevailing mainstream view, including the major advanced economies such as the US, Europe and Japan, as well as the International Monetary Fund, is that QE is the right policy response to prop up the economy and stave off deflation.