quantitative easing definition
If investors needed a reminder that global stock market rallies have been goosed by the Fed's lose monetary measures, they got it.
On Wednesday, U.S. equities went on roller-coaster ride.
The Dow Jones Industrial Average, up 155 points before FOMC Chairman Ben Bernanke said the Fed could soon begin to tap the brakes, ended the day down 80.41, or off by 0.5%,.
The uncertainty of when the Fed would begin to wind down its $85 billion-a-month in asset purchases sent investors to the sidelines in a hurry.
"This is a very sensitive market and particularity sensitive to any notion that tapering will come too soon," Quincy Krosby, market strategist at Prudential Financial in New York told Reuters.
"No one wants to be selling if the data reaches the point when the Fed begins to specifically talk about tapering. The market doesn't wait for the Fed to move. It will move before. That's how it operates," Krosby continued.
Of course, we knew QE couldn't really last forever. So what should investors do?..
What Every Investor Should Know About the End of QE
Equity markets around the world yesterday expressed their distaste for the possible end of the Federal Reserve's quantitative easing (QE) policy.
Share prices tumbled from New York to Tokyo. Even resource-rich Australia and emerging markets, including China, saw shares decline following the release of the minutes of last month's Federal Open Market Committee meeting.
What upset the markets was a discussion at the January FOMC meeting about when and, more importantly, how to end the current QE policy.
As someone put it on Bloomberg Radio yesterday, "Would the markets have been happier if the FOMC was ignoring the issue of how to end QE?"
To understand how ending the QE policy might affect the economy and markets, investors need to understand how QE operates.
Will the Fed End QE This Summer?
Amid all of the hoopla over the Standard & Poor's 500 Index touching 1,500 on Friday, it seems few people noticed that the yield on 10-year U.S. Treasury bonds has risen to within a couple of basis points of 2%. That is nearly 30 basis points higher than it was one month ago and 10 basis points higher than one year ago.
It seems as if the bond market is beginning to price in higher inflation at the long end of the yield curve, and that is something that has got to be worrying the Fed.
Successive rounds of quantitative easing (QE) have added a lot of liquidity to the U.S. economy and this has been repeated globally with massive amounts of liquidity being pumped into the market by the Bank of Japan (BOJ), the European Central Bank (ECB) and the Bank of England (BOE).
The Bank of Japan has committed itself to further aggressive easing under pressure from the newly elected government headed by Prime Minister Shinzo Abe. Even if BOJ Governor Masaaki Shirakawa has any second thoughts about additional easing, he will keep them to himself.