February 2, 2022
As we know the Fed is due to end its QE program in March, and begin the liftoff in rates.
Let's take a look back at the many iterations of QE, and the subsequent ending points, following the depths of the financial crisis.
What impact did these events have on market interest rates (i.e. yields)?
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The idea behind QE is that the Fed's involvement in the Treasury market puts downward pressure on yields. Lower yields stimulate economic activity through more affordable credit, and forced investment into higher returning (higher risk) assets (among other effects).
As you can see in the chart, QE1, QE2 and QE3 had mixed results. If anything, it could be argued that it created the opposite result in the interest rate market (yields went up, not down). Of course, it can then be argued that the stimulative effect of the Fed's bond purchases improves the economic outlook, and therefore yields go higher.
But you'll also note, from the chart, when QE ended, yields generally went lower.
Now, moving along to the right side of the chart, you can see that this pandemic round of QE pushed yields up (not down).
With all of the above in mind, will the end of QE next month send yields lower?
Unlikely.
A key difference this time? Inflation and growth are clearly better. But maybe more important, other global central banks will be following the Fed to the QE exit door (and following into a subsequent tightening cycle). For much of the post financial crisis environment, as the Fed was ultimately able to exit QE and start lifting rates, deflationary forces continued in Europe and Japan. With that, the emergency policies continued there, and became a heavy anchor for global interest rates.
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