Quantitative Easing: Theory Need Not Apply

By Ben Mountifield:In November 2008 the US Federal Reserve announced its first program of Quantitative Easing, "QE1". Following the announcement the S&P 500 index rose 37.5%. The US market also rallied strongly on the announcement of QE2 and Operation Twist. However in the wake of QE3 which was announced on 13 September, the S&P has fallen 3.2%.Below is a chart of the S&P 500 index which shows the announcements of QE1, QE2, Operation Twist and the Fed's latest round of stimuli, QE3.

By CFA Institute Contributors: By Ron Rimkus, CFA

By Tim Shaw:The market is running on the hopes of QE3 being released by The Fed. Let's have a look at five asset classes in the hopes of gaining some perspective into movements of those markets. I want to look at the prior QE1 and QE2 time periods and see how the markets reacted prior and after the announcement.

WHY QE3 WILL NOT WORK AND WILL NOT HAPPEN With equity markets (SPY) plummeting and economic activity indicators falling off a cliff in the USA and around the world, many are calling for the Fed to act decisively in order to prevent a recession. Specifically, many are calling for another round of quantitative easing (QE).

Charles Cecil submits: As we watch the Fed prepare to pump ever increasing amounts of liquidity into the U.S. monetary system (between $500 billion and $2 trillion is being discussed), we observe the price of listed securities and commodities rising, giving the appearance that there is a direct connection between Fed QE2 and the actual value of stocks, bonds and traded commodities.

Chris Ciovacco submits: Given the stark contrast between asset class performance before and after the implied announcement of QE2, the Fed’s statements related to quantitative easing in the coming weeks will have a significant impact on the outlook for stocks (SPY) and the relative attractiveness of asset classes, market sectors, and subsectors.

So Ben Bernanke, the Fed chairman, on Friday explicitly justified the logic for another round of quantitative easing (or “QE2″) to salvage our sputtering economic recovery. On one level, what’s striking about Bernanke’s speech at a conference of the Boston Fed is how textured, detailed and unambiguous it is in trying to explain a decision the [...]