Blue Point Trading - Hey, I thought QE was Over?


Hey, I thought QE was Over? The US Federal Reserve has said last month, that its $4.5tn bond-buying programme (known as QE, quantitative easing), has ended. This announcement has halted a radical monetary policy introduced nearly six years ago, to steer the world’s largest economy through the financial crisis.

The System Open Market Account (SOMA) is one of the monetary policy tools used by the Fed, that contains assets acquired by open market operations (OMOs). It is managed by the Federal Reserve Bank of New York, which the Federal Open Market Committee (FOMC) designated to execute OMOs on behalf of the entire Federal Reserve System. A report is released each Thursday on these QE activities – click here.

As a reminder Fed Chair Yellen did say, that though QE is ending, the Fed balance sheet would remain at current levels. They would only begin to reduce their balance sheet when they started the rate hike process. Meaning, as assets on their balance sheet come to maturity, they would replace those securities with new Fed purchases. So in a sense, the Fed is still buying assets and QE is continuing.

Here is the interesting point. When you look at the actual SOMA reports, this past week it looks as if they actually increased their asset purchases by nearly another $20bn. I thought QE was supposed to end? Perhaps it was just a technical issue, and the Fed will sell securities to even this out. Or perhaps as well it is just noise in the grand scale of the programme. The correlation of QE and the SP500 advance has been tight – see the thumbnail chart. We will have to watch these reports in the future to see what is actually happening.

Blue Point Trading, William Thompson