Today, the Federal Reserve made its final bond purchase of the Covid QE monetary program:
Today, March 9, also marks the 13 year anniversary of the start of the post-Great Recession bull market rally, although it has been some time since the markets made a new high, and the bull market may in fact already be over.
Still, it’s somewhat poetic.
QE comes to an end after purchasing nearly $6 trillion of Treasuries and mortgage bonds in the past two years after the onset of the Covid pandemic.
As Bloomberg details, the current QE – which we are confident will make a fresh reappearance in a few months just as stocks implode and the economy slides into recession, perhaps alongside the Fed’s direct purchases of stocks and equity ETFs – which included more than 580 separate operations to buy Treasuries and 1,200 to purchase mortgage-backed securities, dwarfed all three of the Fed’s previous quantitative-easing programs combined, helping to grow the central bank’s balance sheet to an unprecedented $8.4 trillion.
Of course, the Fed won’t be fully out of the bond market, where it will remain keenly involved through its day-to-day management of policy and also intends to purchase some securities through auction add-ons as those it currently holds mature and roll off. But this week marks the end – for now at least – of the program it’s been conducting in the secondary market to expand the balance sheet through bond-buying.
Here’s how the program that’s winding up compares in size to the earlier ones aimed at growing the Fed’s total holdings, in billions of dollars. All these programs were done at times when the Fed’s policy rate was effectively 0%, in order to keep additional downward pressure on yields.
In addition to these, the Fed conducted a fifth program in 2011-2012, commonly known as Operation Twist, which essentially replaced $667 billion of short-dated debt with longer-term securities, but didn’t change the overall level of debt holdings. It also pretended it didn’t hold a QE in the aftermath of the repo crisis in Sept 2019, and even though Powell claimed it was “NOT QE”… it was.
The total quantity of purchases under the program exceeds growth in the Fed’s System Open Market Account over the same period. That’s because a portion of its purchases of mortgage bonds was in fact reinvestment of funds returned by the issuer as borrowers repaid principal on the loans underpinning those securities. By contrast, reinvestment of maturing Treasuries was handled separately, via auctions, rather than through secondary-market buying.
Hilariously, Fed officials have said they’re likely to begin to shrink the balance sheet, beginning as soon as this year, just as the next global depression hits, by not replacing a fixed dollar amount of its maturing Treasury holdings each month.
Good luck with that
I know the war in Ukraine is the biggest story in the world right now, but the official end of QE4 is a major deal for US markets. There’s a very strong correlation between the stock market and the Fed’s increasing balance sheet–markets for the past 13 years have been hard-pressed to find any positive, upward momentum in the absence of QE.
Markets went sideways for about 2 years starting with the end of QE3 in late 2014, and only began rallying again once Trump was elected.
This is your final warning: the stock market is now in a very different environment from the one it has been in the past 2 years. The underlying rules of the game–“buy when the Fed printer is on”–have changed.
Now we have 7.5% inflation, war in Europe, sky-high gas prices and commodity prices in general, no more QE, and the Fed is about to start hiking interest rates.
Again: this if your final warning. The markets are unlikely to handle these developments well. I firmly believe there will be considerable pain ahead for people who are heavily long in the market right now, especially those in richly-valued tech names.
Although of course, using ARKK as a proxy, it’s likely that tech investors have already been decimated for a while now.