The QE (Quantitative Easing) program was implemented for the first time in January 2009 in response to the global financial crisis of 2008 caused by the US subprime mortgage crisis of 2007-2008.
At the time of that crisis, it became obvious that the US authorities were facing a situation where the usual anti-crisis measures known since «the Reaganomics days» (reducing the fiscal burden, stimulation of demand with credit, cutting the key rate, increasing the national debt) were clearly not enough. That made the authorities resort to extraordinary measures to keep the country’s financial system functioning.
The main idea is that along with the typical key rate cuts, the Central Bank pumps new liquidity directly into the country’s financial system by purchasing debt-based assets from banks and other private companies with a new emission of money. This transforms a significant part of problematic corporate debt into government debt, increases the country’s bank reserves, and raises the prices of acquired assets.
The round ran from January 2009 to August 2010. The main target of the buyback was mortgage-backed securities (MBS).
This round ran from November 2010 to June 2011 and covered the buyback of long-term US government bonds.
This round ran from September 2012 to October 2014.
Since October 2017 the Fed has been tapering off some of its QE policies leading to a decrease in assets on its balance sheet to $3.7 trillion.
In October 2019, the Fed started buying up assets again. In March 2020, it reduced the key rate to zero and announced unprecedented plans to buy back an unlimited amount of «debt-based» assets, including junk bonds with «BB». rating.
The US national debt will exceed 130% of GDP by the end of the year– this is a significant and relatively risky level of debt. The Fed’s demand for Treasury bonds keeps the prices high and, consequently, the interest rates low.
Since January 2009, the financial world has, no doubt, been living in a new reality, and the QE programs have unbalanced the markets to such an extent that no self-respecting economist will take it upon himself to predict the full consequences of QE.
In particular, we see that the QE1 has really helped the stock markets to get out of their slump and restored supply chains up to a certain level. But not everything went as the Fed’s experts expected. Economists assumed that the «cleaned up» bank balance sheets would encourage new loans and that the interest rate cuts would stimulate borrowing: on the one hand, the borrowers would produce more, and on the other, they would buy end products as a result of reduced borrowing costs. However, banks found it much safer to invest new liquidity in the stock market than to finance high-risk loans from non-public companies. This led to the longest-lasting bull market in the US stock market, however, the end consumer got only a small fraction of the money printed.
High inflation could be the other consequence of quantitative easing if economic growth does not exceed the increase in money supply associated with QE. On the other hand, rising inflation may be the desired outcome for paying off the huge debt resulting from the QE. In other words, this debt will be paid by regular US citizens.
If this assumption is correct, we will see the continued nominal growth of tangible assets (for example, US stocks and gold), despite a disheartening economic performance.
In any case, remember that no one can predict the future, but we don’t need predictions to make money. A professionally built investment portfolio must take into account all possible scenarios.