Source:Â Pixabay
Dear Diary,
QE, we hardly knew ye…
Hang the black crepe. Get out the whiskey. Say goodbye. And try to keep the tears from your eyes.
The Dow rose back above 17,000 points yesterday, near its all-time high. Higher stock prices should settle nerves at the Fed’s FOMC meeting. It should leave the central bankers free to let their emergency bond-buying program die in peace.
The Financial Times announced the end even before it happened. On Monday, its headline read: “RIP QE: The quiet death of a radical US monetary policy.â€
But the Fed has to be careful. If it announces that QE is truly dead, it is likely to set off some untoward scenes of wailing and keening in the stock market. Investors will feel a deep sense of loss.
Is the Party Over?
The trouble with death is it is permanent. The dead stay dead. And if investors believe QE will never rise again, they may be disheartened. Or even feel betrayed.
Remember, the central bank was the life of the party. It was central banks that brought the booze… leading to the big run-up in US stock prices over the last five years.
If QE is history, most likely so is the bull market on Wall Street. The party is over. Stock prices are likely to put on their coats and hats and go back whence they came.
The Fed has already given out the word that, although QE may be breathing its last breath, its offspring will live on.
The Fed will not be selling its roughly $4.5 trillion portfolio of bonds… or even allowing it to expire of natural causes.
In the normal course of events, these bonds would mature and then – as all of us will – disappear. But Janet Yellen tells us it will be reinvesting the funds from maturing bonds in new issues. In other words, it will continue to soak up new bonds, helping to keep a lid on yields.
We doubt that will be enough…
An economy that depends on debt needs more and more of it to get the same buzz going. The first time you pump a lot of credit into an economy’s veins you get quite a rush. It’s only later that the shakes begin.
