When Will QE End?


The Federal Reserve surprised investors on September 18, 2013 with news that they would continue their monthly bond purchase program. Investors had expected the Fed to start to taper (i.e., reduce the amount of bonds it purchased per month) its bond purchase program known as Quantitative Easing (QE). Since December 2012, the Fed has been purchasing $85 billion in mortgage and treasury bonds each month in an effort to lower interest rates on bonds. This, they believe, has been making it less expensive to borrow, thus boosting the economy.

Stock prices around the world jumped on the news that the world’s largest economy would continue its aggressive, stimulative economic policy. Bond yields, mainly on U.S. debt, fell sharply with the news that the heavy weight of the Fed’s purchases would continue to press interest rates lower. The yield on 10-Year Treasury bills fell from 2.86% to 2.71% in a day.

Mission: Incomplete
In the Federal Reserve’s eyes, the mission of QE has not been completed. The Fed has stated their goal of lowering the unemployment rate to 6.5% as long as inflation remains manageable. Inflation has been tame, currently at 1.5% (source: Bureau of Labor Statistics–BLS), and the unemployment rate has declined to 7.3% (source: BLS), but the Fed is worried that the unemployment rate decline is slowing.
Back in June, the Fed suggested that a reduction in QE was coming since the economy was getting better, housing was up sharply and unemployment was falling. But the news of a taper sent interest rates up rapidly. The 10-Year Treasury saw its yield increase approximately 1% in a two month span of time.

In June, the Fed also indicated that it would most likely end the bond buying program once the unemployment rate reached 7%. At that time, they felt the U.S. economy would hit that unemployment level in early 2014. Fast forward three months; the Federal Reserve now feels unemployment won’t reach the 7% level until mid-2014, and they are now suggesting that QE may continue past 7% unemployment. Thus, they postponed any reduction in bond purchases.

Pedal to the Metal until December?
The Federal Reserve has stated that any change in QE is data dependent. It is good to see that they are keeping their word, as more recent data suggested a slower decline in unemployment and higher interest rates have slowed real estate growth.

Most likely, we will have to wait until December for an update on QE, since this is the next time the Federal Reserve will update its economic forecasts. At that point, the Federal Reserve will have more information on employment trends to evaluate and will determine if they should keep their foot on the gas pedal or if they should start the gradual deceleration process.


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