Quantitative Easing (QE) and Fed`s objection behind it

Since 2007/2008 crisis Fed made several steps towards improving and stimulating our economy. One of the most well-known and frequently heard (in media) strategies is Quantitative Easing (QE). It`s frequently heard but not a frequently used open market operation, this is only third time Fed had to use QE to foster its goals to stimulate high employment and to keep inflation and long-term rates within the range.

So, what is this QE and how it works. In the late 2012, Fed announced that it would buy mortgage-backed and long-term treasury securities for $85 billion every month. This purchases reduces the supply of those securities which drives their prices up and yields down. Lower yield is important for two reasons: 1. The lower the yield is, the lower the mortgage rates are, which means more affordable housing for population. 2. Lower yield encourages investors to find the securities with higher yields which usually are corporate bonds or other privately issued securities. Thus, QE caused downward pressure on yields across the board because high demand will cause higher prices and lower yields for private securities as well. As a result Fed can reach its goal to keep long-term rates lower and stimulate economy.

Their objection is that lower yields result into lower cost which on its own is supposed to increase expenditure and the latter contributes to GDP and economic growth. Spurring spending usually leads to a lot more hiring and investment increases.

Another strategy is to keep a short-term interest rate=federal fund rate low. Currently Fed keeps its fund rate near zero to improve unemployment rate. The idea behind it is that if the short-term rates are lower, then banks and corporate world has more funds available at lower cost to invest in long-term development and operations which is supposed to spur our employment and economy.

The questions I have regarding these strategies are following:

How long can Fed keep short-term interest rates near zero? The interesting part about this is that we all know from the history economy does not stay on the same level for very long. At some point booming economy might collapse and Fed will need this tool again to lower its fund rates. However, it will not be able to use this strategy if it keeps the rates near zero now because rates cannot go below zero. So, what happens when Fed will have to start increasing its fund rates?

They manipulate with short-term rates to keep unemployment rate low and this QE was directly connected to the unemployment level by saying that Fed will start tapering when it sees unemployment going down. This is all understandable but I am concerned about the rate they use to measure the unemployment and this idea of labor force vs discouraged/out of labor force population. If a person is discouraged how come he/she is considered out of labor force and thus not included in unemployed people. And how well can this measurement of the employment situation show us true economic situation in the country?

And last but not least idea that surprises me is this fear of tapering. Everyone on the Wall Street is concerned that tapering will cause a drop on the market. But does not tapering happen because economy is stronger? If the economy is strong and booming why would any given investor want to find a shelter under the treasury bonds with lower returns? Especially when Fed spent months explaining that tapering does not presage an imminent raise in a short-term rate. I think we should be more concerned about when Fed is starting to raise a fund rate rather than tapering. And we saw that market did not collapse when Fed decreased its QE by ten billion in December, 2013 and another ten billion in January, 2014.

I would like to finish with a quote from Yahoo Finance article by Jon Hilsenrath, which proves my fear towards rates: “If the officials raise interest rate too soon, they risk choking off the recovery – but raising them too late could send inflation too high or fuel financial market bubbles.”

For more information and some ideas you can check out Federal Reserve Bank`s web page and Reuters Article about QE3.

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13, is it really a bad luck?

We have heard from childhood that number 13 brings a bad luck to us. How many times we have heard jokes about people with birthdays on 13th of the month, how many times we avoided getting the exam slip numbered 13. It sounds silly but people are superstitious, we like coming up with such excuses to justify some of the pitfalls.

We all remember 2007/2008 crisis, skyrocketed unemployment, no one wanting to spend even on Christmas gifts, millions of dollars lost and economy sank into the dark hole. Of course, there were many speculations that America had not seen anything like this before and there were others saying that this was just another financial crisis. Global credit crunch definitely ended up being way more than just another crisis. Banks and other financial institutions` excessive risk taking became fatal for the countries` economies. The UK started crisis caused collapsed global financial market drivers like Lehman Brothers, Bear Stearns and Merrill Lynch. The damage was countless as the value of the economic bubble was artificially priceless.

There were different voices claiming different periods to recover from the crisis but no one could imagine that recovery would be vivid in 2013. It is not because of the superstition we mentioned above about number 13, it is just because everyone silently thought that it would take more than 5 years to start believing in American Dream again. But you can believe it, we had all-times high market for the last week of July. Is strong recovery really here or “a strong stock market is just a good image for a strong recovery” (Alchemy Equity Research)?

Whether it is an image or not we have another half of the year to go and make conclusions about our feelings regarding this year of 2013.

Let`s Have a Cup of Tea with Tea on Wall Street

Hello folks! Welcome to my new blog where you will enjoy reading about the past, present and the future of Wall Street and everything it represents or everything you affiliate it with. So, grab your cup of tea and let the story begin…

At first, let me introduce myself. My name is… Well, you can call me Tea… I am at the beginning of my career ladder and I might go all the way up in the air, I mean, Wall Street or maybe for some of you it means going down to the “Ninth Circle” (Thank you Dante). 

My journey started in Georgia, the country not the state, when my mom believed I could swim and encouraged me to jump in the water despite my anxiety, when my Papuli (that’s how I called my grandpa) told me I had to swim long-distance to reach the goal and finally when my professor told me about this dreamlike place called Mount Holyoke and it was on the other side of the Atlantic ocean… 

I packed my backpack and the first stop: Mount Holyoke College. To make a long story short, let me give you expressions and words which can describe it: Homelike, heaven-like, reddish yellow, support from everyone, encouragement, women power, striving for excellence, these for general folk; and some for my MoHo friends: MoHome, M&Cs, Sunday Brunches with Jorge and Mountain Days (P.S. feel free to add some more in the comments). I am only at the second stop, after MoHo I packed my backpack and the second stop – NYC. I hope the city that never sleeps has something for me too.

This is where I come from, I come from the country which has ancient history and it has always been going through ups and downs without giving up and I was raised like that. I am coming from the community of young women where we have been taught that a will is a power as long as you implement your strengths with a strategy. So, here I am, I have a will, I have been working on my strengths and I am developing my strategy…

But this blog is not about me… It is about my experience learning more about Wall Street and I would appreciate your support and contribution to the discussions… I will try to make at least one post every week about different topics, books, resources, web pages, current events, market ups and downs, powerful people or companies, anything connected to the financial industry that I encounter on everyday basis. I will try to incorporate my thoughts, other’s opinion and experts’ conceptions in the post and let you continue the discussion in the comments box.

I think I am going on and on here. I think this is enough for now and I am looking forward to reading all your comments about my first post soon and, of course, I would welcome your critique and suggestions anytime…

Thank you for your attention and hope you enjoyed your cup of tea… 🙂

P.S. Come back I will have some more tea for you…