November 18, 2019
As we’ve discussed, the Fed has gone from shrinking the balance sheet (quantitative tightening) to expanding the balance sheet again, with any eye toward buying almost half-a-trillion dollars worth of Treasury bills.
This reversal in global liquidity is probably more important than the flip-flop in interest rates. And it has been aggressive, as you can see in the chart below. They’ve already bought $267 billion worth of short-term Treasuries.
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With this underpinning, stocks have gone up! Why? Let’s take a look back at a quote from the architect of the Fed’s emergency monetary policies. When the Fed announced QE2 in late 2010, Bernanke penned a column for the Washington Post, titled, Aiding the Economy: What the Fed Did and Why. “… low and falling inflation indicate that the economy has considerable spare capacity, implying that there is scope for monetary policy to support further gains in employment without risking economic overheating. The FOMC decided this week … to deliver that support by purchasing additional longer-term securities, as it did in 2008 and 2009. The FOMC intends to buy an additional $600 billion of longer-term Treasury securities by mid-2011 … This approach eased financial conditions … Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.” In short, as Bernanke acknowledged here, and more explicitly as he continued doing lengthy interviews to answer critics of QE, QE tends to make stocks go up – which is an intended consequence. |