The Fed’s fantastic failure
By: Clif Droke
Sunday, 16 December 2012
Question: When is an unprecedented economic event tantamount to a non-event? Answer: When another Fed intervention is announced.
The U.S. Federal Reserve bank announced this week the commencement of a new round of Treasury purchases to the tune of $45 billion a month to replace the expiring Operation Twist. This is in addition to the recently launched QE3 program that committed the Fed to buying $40 billion a month in mortgage-backed securities. The grand total of these central bank interventions amounts to some $1 trillion a year in government debt markets.
Financial markets were largely unimpressed with the announcement of QE4, essentially reversing what had been an impressive rally in stocks on the day of the Fed’s policy meeting. This marks the second time in a row that investors have basically yawned at the commencement of another quantitative easing (QE) program, and for good reason: each successive QE has been followed by diminishing returns in the stock market. The following graph illustrates the diminution of returns since QE1 was expanded in 2009.