Some of the impacts of QE so far

by Jay Pestrichelli on September 13th, 2012


While the debate about the impact of QE on the economy rages on, its tough to say the equity markets haven’t benefited. Below is a chart I pulled from a blog we follow called The Big Picture.
The grey sections of the chart ate the periods of when the Fed was active in the market buying treasuries.
In all 3 phases, the market has risen and when they weren’t buying treasuries, the market was flat or down. This is why everyone is bullish on equities as long as the  Fed continues these programs.

One of the Fed’s mandates is managing unemployment rate. As we write about that on a regular basis here on Buy and Hedge, you should be well informed that the rate still shows a tremendous amount of weakness. The Fed will continue to take dramatic actions to drive that rate down. Despite the percentage dropping, no one is going to argue that things are going well with this highly important metric. Hey, at least we’re not Europe (added to the chart below)

The long-term impact is still unknown and many believe that this infusion of cash will cause inflation. We actually believe that is the case as well as propose that is the Fed’s intention, to a point.  The Fed would like inflation to hover around 2% annually and that is right where we are. If anything, the chart below indicates it is dropping. Incidentally tomorrow the August CPI report comes out. 


Much of gold’s run the last month has been on the basis that inflation will rise if the Fed implements another round of QE, which seems to have a high probability of happening. However, if inflation is actually still within range where the Fed wants to keep it, this recent move in the precious metal may be unjustified. However, its difficult to say gold hasn’t benefited from the QE programs. Just look at a chart of the last 4 years on gold


Finally, lets look at the impact on interest rates. Of course we know the story about rates dropping on US Treasuries. That will of course be the result as the government is in the market buying them, which drives the price up.
But we believe that the Fed’s intention is to reactivate the housing market and intends to do so by lowering mortgage rates. While the Fed can’t tell banks what to lend for, they can create a competitive environment where lenders will have to lower their rates.  The chart below suggests that the Fed has been successful in this endeavor as well. 
Should the Fed implement QE3 or some other tactic intended to lower interest rates, expect the trend in the chart above to continue.
The Fed has made an impact on the equities, gold, and interest rate markets and not at a cost of inflation. However, where they fall short continues to be unemployment. I don’t get the sense they are giving up on that, so we expect more action until it hurts.
Broader and longer economic impacts of the QE programs have yet to rear their ugly head, but for those of us working in the financial markets, Chairman Ben has lent a helping hand.

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