Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.
Ben Bernanke, Washington Post Op-Ed, November 4, 2010
Bernanke’s statement above lays out the purpose of QE as he sees it. It is all about the stock market and creating a wealth effect. So how effective has QE been in moving stocks? Below we detail all the different phases of QE along with any subsequent pauses along the way. We also detail how the stock market has performed in each phase.
<Click on chart for larger image>
QE1 – November 25, 2008 to March 18, 2009 (-9.25%)
We mark this period as starting on November 25, 2008 with this unscheduled FOMC statement:
The Federal Reserve announced on Tuesday that it will initiate a program to purchase the direct obligations of housing-related government-sponsored enterprises (GSEs)–Fannie Mae, Freddie Mac, and the Federal Home Loan Banks–and mortgage-backed securities (MBS) backed by Fannie Mae, Freddie Mac, and Ginnie Mae. Spreads of rates on GSE debt and on GSE-guaranteed mortgages have widened appreciably of late. This action is being taken to reduce the cost and increase the availability of credit for the purchase of houses, which in turn should support housing markets and foster improved conditions in financial markets more generally.
Purchases of up to $100 billion in GSE direct obligations under the program will be conducted with the Federal Reserve’s primary dealers through a series of competitive auctions and will begin next week. Purchases of up to $500 billion in MBS will be conducted by asset managers selected via a competitive process with a goal of beginning these purchases before year-end. Purchases of both direct obligations and MBS are expected to take place over several quarters. Further information regarding the operational details of this program will be provided after consultation with market participants.
Since markets anticipate, we started QE1 with the date of its announcement (November 25, 2008) and not on the date it started (the following week).
We mark the end of this period with the expansion of QE1 on March 18, 2009 (more below).
Why Did Stocks Decline?
The perception is the market rallies when quantitative easing is underway. So why didn’t the stock market rally? Despite the implementation of QE1, the Federal Reserve’s balance sheet actually contracted, as shown below in blue. QE1’s asset purchases (red line) were inadequate in offsetting the closing of lending facilities (loans) such as TAF (Term Auction Facilities) and the CPFF (Commercial Paper Funding Facilities), shown in green.
<Click on chart for larger image>
Simply put, QE1 was too small. So on March 18, 2009 the FOMC expanded the program. This increase in purchases had a profound effect on the markets.
QE 1 Expanded – March 18, 2009 to March 31, 2010 (50.29%)
On March 18, 2009, at the FOMC meeting, the following was released:
In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. To provide greater support to mortgage lending and housing markets, the Committee decided today to increase the size of the Federal Reserve’s balance sheet further by purchasing up to an additional $750 billion of agency mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion this year, and to increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion. Moreover, to help improve conditions in private credit markets, the Committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months. The Federal Reserve has launched the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses and anticipates that the range of eligible collateral for this facility is likely to be expanded to include other financial assets. The Committee will continue to carefully monitor the size and composition of the Federal Reserve’s balance sheet in light of evolving financial and economic developments.
We mark this date as the start of QE1 Expanded.
As the statement above notes, the FOMC expected QE1 Expanded to end on September 30, 2009 (highlighted). However, on August 12, 2009 the FOMC said :
They would gradually slow the pace of these transactions and anticipates that the full amount will be purchased by the end of October.
In other words, the FOMC said they would extend the end date of their program, choosing to taper their purchases rather than end them immediately. Then, on September 23, 2009, the FOMC said:
The Committee will gradually slow the pace of these purchases in order to promote a smooth transition in markets and anticipates that they will be executed by the end of the first quarter of 2010.
The FOMC made no further changes to QE1 Expanded and it tapered to an end on March 31, 2010.
First Non QE Period – March 31, 2010 to August 27, 2010 (-8.97%)
The Federal Reserve ended QE – Expanded on March 31, 2010 as detailed above. We date this as the beginning of the First Non QE Period. This period ended with Bernanke’s now infamous Jackson Hole speech of August 27, 2010 (more below).
A heated debate took place at the end of QE 1 – Expanded about the future of Federal Reserve policy. The majority of economists believed the Federal Reserve was permanently done with QE programs on March 31, 2010. We detailed this on March 17, 2010. Since no more monetary stimulus was forthcoming, the equity market struggled until Bernanke reversed course in his Jackson Hole speech by suggesting more monetary stimulus would be coming.
QE 2 – August 27, 2010 to June 30, 2011 (22.81%)
We date the beginning of QE2 as Bernanke’s Bernanke’s now infamous Jackson Hole speech on August 27, 2010. Most believed the key passage below signaled QE2 was coming:
The Federal Reserve is already supporting the economic recovery by maintaining an extraordinarily accommodative monetary policy, using multiple tools. Should further action prove necessary, policy options are available to provide additional stimulus. Any deployment of these options requires a careful comparison of benefit and cost. However, the Committee will certainly use its tools as needed to maintain price stability–avoiding excessive inflation or further disinflation–and to promote the continuation of the economic recovery.
This program was formalized at the November 3, 2010 FOMC meeting:
To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to expand its holdings of securities. The Committee will maintain its existing policy of reinvesting principal payments from its securities holdings. In addition, the Committee intends to purchase a further $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month. The Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability.
The Federal Reserve ended this program all at once (no taper) on June 30, 2011, just as they promised when they first announced it.
Second Non QE Period – June 30, 2011 to August 26, 2011 (-9.99%)
We date the Second Non QE Period from June 30, 2011 (the end of QE2). Just like QE1, the perception among a majority of economists was that QE2 marked the end of all Federal Reserve stimulus. The market slumped on this idea until Bernanke’s Jackson Hole speech on August 26, 2011 suggested otherwise.
At this speech Bernanke dropped big hints that Operation Twist was coming. This was confirmed by a September 6, 2011 Wall Street Journal article stating the market expected Operation Twist to be approved at the September 22, 2011 FOMC meeting. None of this was a surprise because Bill Gross had predicted Operation Twist was coming as early as June 15, 2011.
Operation Twist – August 26, 2011 to April 4, 2012 (18.88%)
We date the beginning of Operation Twist from Bernanke’s Jackson Hole speech on August 26, 2011. The program was approved at the September 22, 2011 FOMC meeting.
We date the end of Operation Twist as the April 4, 2012 article by Jon Hilsenrath of The Wall Street Journal. Hilsensrath, who is widely considered to be the Federal Reserve’s mouthpiece, said:
The Fed is in no hurry to launch new measures to boost economic growth, minutes from the central bank’s most recent meeting showed, disappointing investors eager for more stimulus. Among the hints dropped in minutes of the Fed’s March 13 policy gathering, Federal Reserve staff concluded that the U.S. economy is a little more susceptible to inflation than previously thought. That and other signals suggested that another round of bond buying by the Fed to push down long-term interest rates isn’t imminent.
Hilsenrath Says QE To End With Twist’s End – April 4, 2012 to June 6, 2012 (-5.99%)
Since market’s are forward-looking, we believe the period between the Jon Hilsenrath article saying the Federal Reserve would end stimulus with the end of Operation Twist and the Hilsenrath article saying the Federal Reserve is reconsidering should be treated as a separate period, similar to the Non QE periods noted above. This period begins with Jon Hilensrath’s April 4, 2012 article noted above and ends with this June 6, 2012 article:
Disappointing U.S. economic data, new strains in financial markets and deepening worries about Europe’s fiscal crisis have prompted a shift at the Federal Reserve, putting back on the table the possibility of action to spur the recovery. Such action seemed highly unlikely at the central bank’s April meeting, when forecasts for growth and employment were brightening. At their policy meeting this month, Fed officials will weigh whether the U.S. economic outlook is deteriorating enough to justify new measures to boost growth, according to interviews and Fed speeches.
Hilsenrath Backtracks on QE’s End – June 6, 2012 to August 17, 2012 (7.83%)
We date this period from Hilsenrath’s June 6, 2012 article noted above to this August 17, 2012 article:
The Federal Reserve’s “hawks” are speaking out against additional action by the central bank to spur the economy. The Fed has moved despite this group’s opposition before. Thus, the comments now don’t represent a signal from the central bank that it is backing away from its statement earlier this month that it might act.
Underscoring the idea that Operation Twist was not the end of Federal Reserve stimulus was the June 20, 2012 FOMC meeting two weeks later where the FOMC extended Operation Twist’s end from September 30, 2012 to December 31, 2012:
The Committee also decided to continue through the end of the year its program to extend the average maturity of its holdings of securities. Specifically, the Committee intends to purchase Treasury securities with remaining maturities of 6 years to 30 years at the current pace and to sell or redeem an equal amount of Treasury securities with remaining maturities of approximately 3 years or less.
QE 3 – August 17, 2012 to November 29, 2012 (-0.16%)
We date QE3 from the August 17, 2012 article noted above. On August 23, 2012 Hilsenrath underscored QE3 was coming with this:
The Federal Reserve sent its strongest signal yet that it is preparing new steps to bolster the economic recovery, saying measures would be needed fairly soon unless growth substantially and convincingly picks up.
QE3 was approved by the FOMC on September 13, 2012:
To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee agreed today to increase policy accommodation by purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. The Committee also will continue through the end of the year its program to extend the average maturity of its holdings of securities as announced in June, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. These actions, which together will increase the Committee’s holdings of longer-term securities by about $85 billion each month through the end of the year, should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.
We date the end of QE3 with the November 29, 2012 Jon Hilsenrath article stating more QE was coming after Operation Twist ended on December 31, 2012:
Federal Reserve officials are likely to continue buying long-term mortgage-backed and Treasury bonds in 2013 as they confront a slow-growing economy and threats of new turbulence and uncertainty related to fiscal policy. Fed officials face several important decisions at their next policy meeting Dec. 11-12, the most pressing of which is what to do about those bond-buying programs, which are meant to drive down borrowing costs, boost the prices of assets like stocks and homes, and stimulate spending and investment. Fed Chairman Ben Bernanke said at his news conference in September that the central bank would review all its asset purchases at the end of the year, when one of the bond-buying programs expires.
QE 3 Expanded – November 29, 2012 to May 1, 2013 (12.82%)
We date QE3 Expanded from the November 29, 2012 Jon Hilsenrath article noted above to the May 1, 2013 FOMC meeting where the committee said:
The Committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes. In determining the size, pace, and composition of its asset purchases, the Committee will continue to take appropriate account of the likely efficacy and costs of such purchases as well as the extent of progress toward its economic objectives.
Unlike most of the turn dates discussed here, the FOMC’s increase or reduce statement was not widely anticipated by the market.
FOMC Says ‘Increase or Reduce” – May 1, 2013 to Present (4.53% as of May 30, 2013)
We date the Increase or Reduce period from the May 1, 2013 FOMC meeting. This period is still ongoing.
Conclusion
On November 25, 2008 the FOMC first announced QE1. Since that date:
- Total stock market gains, through May 30, 2013 = 92.96% (1,133 trading days)
- Total stock market gains when QE was ongoing through May 30, 2013 = 120.42% (986 trading days or 87% of the trading days since November 25, 2008)
- Total stock market gains when No QE or Hilsenrath said the FOMC would end = -27.46% (147 trading days or 13% of the trading days since November 25, 2008)
This study shows QE has been extraordinarily effective in boosting stock prices and the FOMC is correct to worry what happens when they stop. Restated, the bull market of the last 4+ years has a lot to do with FOMC stimulus. If history is any guide, its removal would figure to be a profound negative for equity prices.