ONE MONTH AFTER the Federal Reserve Open Market Committee embarked on its latest $600 billion shopping spree in the treasuries market, it appears that the market’s anticipation of quantitative easing (QE) II generated a much stronger response than the actual experience of its implementation.
Ten-year US Treasury note yields narrowed from 3.1% in August, when the Fed began in earnest to signal its intention to expand its balance sheet further, to 2.3% in October. Alongside bond prices, the stock market also shot up, with the S&P 500 rising from 1,040 to over 1,220.
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| "Financial conditions eased notably in anticipation of the [Open Market] Committee’s announcement [of QE II], suggesting that this policy will be effective in promoting recovery" Ben Bernanke, Federal Reserve |
In a speech to the European central banking conference in Frankfurt on November 19, Ben Bernanke, Federal Reserve chairman, gave himself a hearty pat on the back for all this. "Financial conditions eased notably in anticipation of the Committee’s announcement, suggesting that this policy will be effective in promoting recovery." However, Bernanke chose to overlook the fact that almost as soon as the policy became official on November 3, stock markets levelled out – the S&P eased back to under 1,200 in the last week of November – and treasuries sold off, causing the very yields the Fed wishes to constrain to start rising again.
