Who took the punchbowl away?
Today we will be talking about quantitative easing and the Fed taking the punchbowl away from the party.
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The Ending of Quantitative Easing
This is a very historic time as the Fed announced on July 9, 2014 that it would be stopping quantitative easing this fall. It was a historic entrance into quantitative easing in post 2008 and it will be a historic exit in October when they won’t do any bond buying at all.
Wayne Gretzky when asked why he was a great hockey player, replied it was because he went to where the puck was going to be. This action by the Fed may be telling us this is where the economy is going. Quantitative easing has gone on for six years and this will be a big change.
A look back at the life of quantitative easing
We believe the events of 2008 were about a lack liquidity in the markets. In 2009 the economy needed the stabilization of quantitative easing to help get us through the effects of 2008 to the point where it could grow again. Without it, the economy could have very well locked up. There is no doubt in our minds it was a positive thing.
We feel the first two years of quantitative easing where the critical years. Bernanke was the right man at the right time. His academic specialty was in the Great Depression and Janet Yellen, who worked for him, was the architect of quantitative easing.
In 2009 the mortgage market was stabilized. It was very out of whack and only by stabilizing it, and keeping those rates low, could that system get going again. Quantitative easing for 2010-12 was a support of an underperforming economy that helped consumer confidence.
What hindered quantitative easing
Quantitative easing probably would have worked faster if it wasn’t for all the debates between the President and Congress. Just when it would start to pick up steam, politics would let the air out of it. It wasn’t that the political debates were bad, it was the fact the liquidity and the mortgage system was so bad, there was no other choice. So the Fed started to reduce the amount of bonds they were buying back at the beginning of the year and this October is when the will bring it to a halt.
The impact on investors
The impact on our economy will clearly come in the rise of interest rates perhaps in 2015 and beyond. The toolbox for controlling interest rates is now going to have to be different which is historic in itself.
It is exciting to see quantitative easing end because it means there are fundamental strengths in the markets and the Fed believes there is enough confidence in the economy. There are a lot of positives in the economy but there are still no guarantees. This is a challenge that we enjoy as we stay on top of the markets for our clients and put all the pieces together.
We will keep you up to date as the rippling effects of the announcement a few days ago play out through the fall. Please contact us if you have any questions on how this could affect you and your investments. We’d love to talk with you.
Greg Powell, CIMA
Email Greg Powell here
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Fi Plan Partners is an independent investment firm in Birmingham, AL, serving clients across the nation through financial planning, wealth management and business consulting. Fi Plan Partners creates strategies in the best interest of their clients using both fee based investing and transactional investing.
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