Unlike nearly everyone else, I have argued that the Fed’s latest round of “quantitative easing” is not why stock prices went up until recently, and that “tapering” Fed bond purchases would have had only a negligible effect on long-term interest rates.
This was a testable hypothesis. If I was wrong, the Fed’s unexpected decision to back away from its previously-expected tapering of bond purchases would have been greeted by a significant, sustained rally in stock and bond prices. That didn’t happen. Instead, stocks fell for at least five days in a row and bond yields barely budged until stocks swooned (triggering a modest flight toward safe havens).
Before the Federal Reserve’s “surprise” at 2 p.m. on Wednesday September 18, nearly every financial reporter was confident the yield on 10-year Treasuries had increased to 2.86 percent from 1.66 percent in early May, simply because Fed officials hinted in May that they might begin to slow the pace of bond-buying by September. If that story had been true, we should have expected bond yields to retrace most of their rise as soon as the Fed removed that fear of the taper. Instead, the 10-year bond yield ended the week of the Fed announcement at 2.75 percent – no lower than the average yield in August (2.74) and merely a trivial 11 basis points lower than the day before the Fed’s surprise.
Financial analysts and reporters were likewise certain the stock market had been terrified about the possible taper before September 18. If that was true, stocks should have soared for days or weeks on the supposedly terrific news that a taper was off the table. On the contrary, U.S. stocks were rising briskly for many days before the Fed meeting, but have since fallen persistently. A few hours of speculative stock gains on Wednesday the 18th were more than erased by Friday the 20th and stocks kept falling the following Monday, Tuesday and Wednesday.
Reporters and analysts who claimed stocks had been shored up by quantitative easing were logically obligated to expect a stock boom from the Fed’s message of no change. When stocks instead moved in the wrong direction, baffled reporters tried to blame their bad forecasts on mysterious “uncertainties” about the taper although there is obviously less uncertainty now than before.
Anyone who bases investment decisions on trendy theories that fail to predict what actually happens is either a poor journalist or a poor investor who pays undue attention to poor journalists. The market’s thumbs down vote on the Fed’s gutless decision to stick with quantitative easing provides added evidence that QE never helped stocks or the economy, and that ending such an obviously unsustainable policy will one day be welcomed as the good news that it really will be.
