In a much anticipated move this week, Fed Chair Janet Yellen announced that Quantitative Easing is being eased out. Does it matter? Will it affect you? Maybe.

Funny how time flies isn’t it?

It doesn’t seem like it was very long ago that no one had even heard the term Quantitative Easing. And yet, even today, a lot of economists disagree on what it actually is, how it truly works or even if it does work at all. Generally associated with the Obama years, it was actually put in motion by the Bush administration as a method of spurring growth during the Great Recession.

The idea was that the central bank would step in and buy trillions of dollars of government bonds — having such a big (and reliable) buyer of bonds on hand was intended to strengthen the bond market and also create a knock-on effect of supporting equity share prices. (There was a bit of black magic in the formula because in order for it to work it had to support bonds while keeping yields artificially low). Detractors pointed out that while the scheme made sense mechanically, it was still creating a strong potential for rapid inflation once the ‘easing’ stopped.

Many said that Quantitative Easing must ultimately be answered with ‘quantitative tightening’.

Well, here we are nine years later and no one actually knows if the scheme worked or what would have happened had it not been put in place. Nevertheless, there IS a pony in this. In Janet Yellen’s press conference she offered these words:

“The basic message here is US economic performance has been good; the labor market has strengthened substantially,”… “The American people should feel the steps we have taken to normalize monetary policy are ones we feel are well justified, given the very substantial progress we have seen in the economy.”

So, what’s not to like? The Fed Chair is pretty confident that the economy can get by without the training wheels and that it is even doing well enough that we’re going ahead with at least one rate hike in the near future.

Here’s the thing that is (maybe) not to like — and it’s actually two things. First, rising interest rates means higher bond yields and while that’s great for bond holders it makes bonds more attractive relative to equities — in other words downward pressure on stock pricing.

It is a popular thought with some in the investment community (although a minority for sure) that stock prices are a bit expensive already. If that community grows in size this bull market may be slowing a bit.

Oh, here’s a third thing…in the words of John Kenneth Galbraith: “The only function of economic forecasting is to make astrology look respectable.”

Market Minute 9/22/2017 – Once Again the Fed Has Spoken

Once again, the Federal Open Market Committee, the ‘Fed’ has spoken. And once again markets have bounced around a bit and will likely settle in a few days. There was no change in interest rates (as expected) but the Fed actually said that they will begin to unwind the QE (asset purchases) as was mentioned at the prior meeting. 

This does not in itself guarantee that another hike will take place in December, or that 3 hikes will take place in 2018 (as she said), but it does suggest that if the upcoming months see a similar mix of strong financial conditions, solid housing data and decent economic data then the Fed will stick to its schedule. We think the time to raise interest rates to get us out of this ultra-low interest rate environment is overdue. 

The economy is quite healthy, and the Fed’s confidence will (in my opinion) still keep us at lower than historical interest rates, and will continue to provide a healthy backdrop to US equities. 

Ronald P. Denk, CFP®
Investment Advisor
Denk Strategic Wealth Partners
10000 N. 31st Avenue, Suite C-262
Phoenix, AZ 85051

Phone (602) 252-8700
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