Swedroe: The Surprising Lessons Of QE

November 05, 2014

The world didn’t end with QE, but plenty of investors were hurt because they believed it would.

On Oct. 29, the Federal Reserve announced the official end to its bond-buying program, otherwise known as quantitative easing (QE).

Given all the debate about the efficacy of the Fed’s policy decisions, and the stomach acid created by the many dire forecasts about what was going to happen when quantitative easing ended, I thought it worthwhile to review the historical record and determine if there are any investment lessons to be learned.

Prior to the financial crisis of 2008, the Fed held between $700 billion and $800 billion in Treasury notes on its balance sheet. In late November 2008, the Fed began its QE program, announcing it would buy $600 billion in mortgage-backed securities (MBS).

By June 2009, it held $1.75 trillion in bank debt, MBS and Treasury notes. And by June 2010, its balance sheet had grown to $2.1 trillion. Further purchases were halted because the economy had started to improve.

QE Round Two

Having come to the conclusion that the economy wasn’t growing fast enough, in November 2010, the Fed announced its second round of quantitative easing (QE2). By the end of the second quarter of 2011, it had purchased more than $600 billion in Treasury securities.

Still not satisfied with the rate of economic growth, a third round of quantitative easing (QE3) was announced in September 2012. The Fed said it would buy $40 billion in MBS a month. It expanded its purchases in December 2012 saying it would also buy $45 billion in Treasury bonds a month.

In December 2013, the Fed announced it would begin to phase out (or taper) the program in January 2014, reducing the amount of its purchases by $10 billion each month. As a result of all these bond-buying programs, the Fed’s balance sheet has grown to about $4.5 trillion.



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