Quantitative easing is under the microscope

0:03Good morning from the Financial Times. Today is Thursday, October 9th. And this is your FT News briefing. Israel and Hamas have seemingly agreed to the first phase of a ceasefire. And the White House wants Brussels to pull back on climate demands. Plus, quantitative easing is the latest central bank tool to come under fire. And so certainly some economists would argue that the process was just taken way too far. I'm Mark Filippino, and here's the news you need to start your day.

0:37U.S. President Donald Trump said late last night that Israel and Hamas have agreed to the first part of his Gaza ceasefire plan. As part of the deal, Hamas would release the remaining hostages taken on the October 7th attacks two years ago. Trump posted on Truth Social that, quote, all the hostages will be released very soon and Israel will withdraw their troops to an agreed-upon line. Israeli Prime Minister Benjamin Netanyahu said he would convene his government today to approve the agreement. Qatar's foreign minister also confirmed that an agreement had been reached. Under the U.S. plan, the Gaza Strip would be governed by a committee of Palestinian technocrats.

1:15The technocrats would be overseen by an international supervisory body led by Trump.

1:26The U.S. government is demanding the EU change some of its environmental laws. Washington is accusing Brussels of, quote, extra-territorial reach. Here to explain the position is the FT's Henry Foy. Hey, Henry. Hey, Mark. So, Henry, what is the U.S. objecting to? It's objecting to a number of things, but it's focusing on what's called the Corporate Sustainability Due Diligence Directive. And essentially, this law, which came into force last year, mandates that companies operating in the EU need to account for every part of their supply chain. and areas where it could impact the environment, where it could impact human rights.

2:06Essentially, any environmental or social harms in supply chains need to be identified by the ultimate company that sells the product. The Americans are saying, look, we don't like this. We think it's extraterritorial. It's going to put burdens on our companies. It's unwarranted regulation. And we'd like you to pause implementation of it and cut out some of the bits we don't like before you turn it back on. There are other demands they have on digital legislation, which we've reported on a lot in the past. There's other demands on deforestation laws and the like, things like this. Basically, the Donald Trump administration is saying that these rules are too strict on American companies.

2:44They target American companies, and American companies should not have to adhere to them. Well, I think the question I have, Henry, is why is the U.S. now making these new demands to change environmental laws? Well, the U.S. kind of holds the whip hand. This summer, of course, there was the trade deal between the US and the EU after months of will they, won't they have a full-on transatlantic trade war. The general opinion on that trade deal is that the Europeans were over a barrel, as we've spoken about before, because of US weapons supplies to Ukraine that they needed, US intelligence to Ukraine that was necessary and couldn't be replaced by Europeans, and the general kind of European reliance on American military might for its own defense.

3:29And so that trade deal was agreed, at least the tariff parts was agreed. But there was this open-ended question over European regulation. And this is what the Europeans have been worried about for a very long time, is the Americans coming back for a second bite of the cherry and saying, OK, here are the bits of your laws that we don't like. Given that the Trump administration is making so many demands of the European Union, what does this overall do to the relationship between the two parties? Well, one of the questions we had in reporting this story to European officials was, okay, what are the Americans offering in exchange for you opening up these laws and potentially modifying them for the Americans?

4:09One EU official that we quoted in yesterday's story said, it's a one-way street, as in, this is not a negotiation. This is a demand. I interviewed the new American ambassador to Brussels recently, who said similar on the digital rules, basically saying, look, we don't think these are right. We think they're nasty towards American companies. You need to change them. There isn't really any carrot coming with this stick from the Americans. And so the worry, of course, is that at some point, the Europeans say enough is enough. We cannot keep having you hector us and demand that we change our rules for your benefit.

4:45And that's when relations could really take a turn for the worse and potentially have a spillover effect into other areas, as I mentioned before, Ukraine, defense, and tariffs. Henry Foy is the FT's Brussels Bureau Chief. Thanks so much, Henry. Thanks a lot, Mark.

5:05Chinese customs agents are on the hunt for an unusual type of contraband, semiconductors. Officers have mobilized at major ports in recent weeks after a government directive targeting advanced NVIDIA chips, but the FT has learned that almost all U.S. semiconductor tech has also faced scrutiny. That hasn't stopped some companies from trying to import them, though. The FT reported that over$1 billion worth of NVIDIA chips were smuggled into China in May, June, and July. Beijing wants to wean its tech groups off of American hardware. The goal is for China to triple its production of advanced semiconductors next year to fill the gap.

5:48quantitative easing or qe was a favorite tool among monetary policymakers in the decade following the financial crisis now this is going to get a little nerdy so stay with me qe is a process where central banks purchase government bonds this is meant to lower long-term borrowing costs for investors and stimulate economic growth but as central bankers around the world have faced growing scrutiny. So has QE. My colleague, Sam Fleming, is here to tell us why. Hi, Sam. Hi, Mark. So, Sam, I gave a little nod to how QE works, but can you tell us more about it and why central banks started to use it?

6:26Sure. So, QE started really around 2008, 2009, during the teeth of the great financial crisis. Central banks have long used their balance sheets in lender-of-last-resort operations, kind of targeted emergency interventions when there's a particular crisis in a sector. But what happened in QE was a much wider monetary operation where central banks judged that lowering interest rates, which is their primary tool, wasn't going to go far enough. And they needed to do more. As you said, they purchased government bonds. They also bought private sector securities, mortgage-backed securities, for example.

7:02QE really has become almost a regular a part of the toolkit through the 2010s and indeed a massive bout of it after the pandemic as well. So, Sam, we've since moved on from quantitative easing in the past few years. Central banks are now sort of doing the opposite. That's a process called quantitative tightening, QT, and they do this by unwinding their balance sheets. I guess, why are all these monetary maneuvers coming back into the spotlight now? The issue of QE has really risen up the agenda in the U.S. in particular because of interventions by the Treasury Secretary, Scott Besant, who has said in recent articles that he is very concerned by the extent to which central bank balance sheets expanded.

7:48He talks of mission creep, compares QE with a lab experiment. But he's not the only one. In the UK, we've also had some big attacks, less on the initial phase of QE and more about the way it's being handled now. The QT process is being handled. Reform, which is leading in the polls, has been attacking the Bank of England for racking up big losses for the taxpayer as it tries to unwind its balance sheet. Would you say that these criticisms, both from US Treasury Secretary Scott Besant and the criticisms coming out of the UK are fair? It's a very complex topic. And certainly economists very much debate whether QE was handled well and particularly whether it went on too long.

8:32Particular question about QE during and after the pandemic, when the central banks were expanded massively. We obviously then had the inflation that started after the pandemic when the lockdowns ended. And so certainly some economists would argue that the justification for QE during that period was less obvious. and indeed that the process was just taken way too far. So I think that economies would talk about the need for a debate as to how closely and carefully you target QE if it's ever to be used, if interest rates get to near zero levels in the future. Is there any concern that the opposition to QE could go too far?

9:11I mean, is there any room for QE still in the central banks toolkit? The debate is going to suddenly weigh on central banks because everyone is aware of the criticism from very powerful individuals in the US, but also in other jurisdictions. It's become a hot potato politically. There are criticisms that QE exacerbated inequality by stoking up asset prices, which helps wealthy people far more than those who don't have lots of equities or other securities. So there is an equality issue. But I don't personally think that QE is by any means off the table in the future. I think if you found countries going into massive economic crises, again, central bankers would definitely feel compelled to intervene in a massive way during those situations.

9:58But I think that the debate will certainly lead to questions as to whether there could be tighter constraints on the use of QE in the future. Sam Fleming is the FT's economics editor. Thanks so much, Sam. Thank you, Mark. Before we go, today is the final day to vote for the FT News briefing for the Signal Awards, which means two things. One, this is your last shot to show your support for FTNB. And two, this will be the last time you have to hear me ask for your vote. Thank God, right? Anyway, if you haven't voted yet, it's really quick and really easy. The link is in the show notes and it only takes a few minutes.

10:32Thank you so much. This has been your daily FT News briefing. Check back tomorrow for the latest business news.

10:41Thank you.