“Quantitative Easing” Means What, Exactly? as published in InsideNova.com
You’ve probably heard the term “quantitative easing.” You probably also have no idea what it means. That’s okay; it’s not your fault. Whoever coined it assigned a horribly convoluted expression to a relatively simple thing. Quantitative easing (QE) is the act of a country’s central bank adding “new money” into its economy.
Our central bank is the Federal Reserve, or “the Fed.” When the Fed engages in QE, you might think they fire up a money-printing press. Without getting too detailed, that’s not how it works. Instead, the Fed goes to the U.S. Treasury market and buys Treasury securities, electronically transferring money it doesn’t actually have to the seller (usually, banks).
Of course if you tried this, you’d end up in big trouble. But the Fed and other central banks can essentially generate legal tender (money) out of thin air. Between November 2008 and
October 2014, the Fed did just that, adding $2 trillion to the economy, hoping to stimulate economic growth. In 2013, the Fed began to taper or slow down its purchases. In 2017, it started to reverse course by letting Treasury securities mature without replacing them.
How effectively QE stimulates the economy is a debate best left to the academics. Personally, I view it as a good economic sign that the Fed is now comfortable reversing its response to the 2008 financial crisis.
More applicable to investors, what can we make of the Fed’s actions and its impact on investor sentiment? The Fed routinely announces intentions to engage in, slow down (taper) or reverse QE. Sometimes it acts immediately on its intent; sometimes, it takes its time. Either way, it’s impractical to try to predict whether or how the markets are going to respond to the perceived effects of QE announcements, the real effects of QE actions, a combination of both, or something else entirely.
Which is, alas, a horribly convoluted way to say you’re better off forming your own investment plan; implementing it with a low-cost, diversified approach; and – at least with respect to investing – ignoring the QE news.