The waiting game continues: Our thoughts on the Fed’s ongoing QE program

The Federal Reserve’s decision

In its Sept. 18 announcement, the Federal Reserve surprised many investors, electing not to taper its asset purchase program, also known as quantitative easing (QE). Apparently, its tapering decision really was conditional on the data. Furthermore, in its announcement, the Fed offered little conviction on the future timing of a taper, stating that tapering will not begin based on a preset course.

The Fed expressed a lack of confidence in the current strength of employment and economic growth. In fact, it reduced its previous gross domestic product growth projections for 2013, 2014, and 2015. Chairman Bernanke raised concerns related to (1) a lack of sufficient confirmation of better economic growth; (2) a recent rapid tightening in financial conditions (due to the rise in market interest rates); and (3) the risk of additional headwinds from the upcoming fiscal debates in Washington.

Most Fed members see the first rise in the Fed Funds rate either in 2015 (the majority) or 2016. No change was made in the FOMC’s previously-announced “thresholds,” and inflation is still running below long-term objectives. Chairman Bernanke did mention that short rates would not necessarily be pushed higher until unemployment fell well below the current threshold target.

Our thoughts on the Fed’s decision

Once again, the Fed’s decision to continue its asset purchase program has provided an immediate boost to risk assets. However, it also raises a number of questions for us, as investors.

Among them, for example:

  • Has the QE program ever really helped improve economic growth, and/or will possibly it help accelerate growth going forward?
  • While the announcement sparked an immediate sense of relief among investors, how will markets react after investors have had some time to think about it?
  • How will the market respond to the news that economic growth is still struggling?

What’s more, investor’s sense of uncertainty continues with the Fed’s decision today — investors will continue asking when the tapering will, in fact, begin. This is important as uncertainty can be an enemy to financial assets, and we have just extended the period of limbo which started in May, when Bernanke told us that tapering would someday happen. Over the history of the QE process, periods of waiting can actually create most of the market move related to the planned QE action.

So here we go again with yesterday’s announcement (non-announcement?) into yet another period of waiting. Based on what we are waiting for (an end to QE), we will continue to watch out for another wave of bond selling at some point.

The views expressed represent the Manager’s assessment of the market environment as of September 2013, and should not be considered a recommendation to buy, hold, or sell any security, and should not be relied on as research or investment advice. Views are subject to change without notice and may not reflect the Manager’s views.

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Investing involves risk, including the possible loss of principal.

Gross domestic product is a measure of all goods and services produced by a nation in a year.

Quantitative easing is a government monetary policy used to increase the money supply by buying government securities or other securities from the market. Quantitative easing increased the money supply by flooding financial institutions with capital in an effort to promote increased lending and liquidity.