What The Market Expects For QE And What The Fed Will Do About It

Volatility could be ahead in the bond markets as the Federal Reserve ponders what to do about its quantitative easing program. Surveys indicate that a majority of participants in the market don’t see the Fed’s plan as ending until the second quarter of next year. That means they expect officials to keep buying $85 billion per month in bonds until then.

What The Market Expects For QE And What The Fed Will Do About It

Changing Market Expectations For Quantitative Easing

Officials at the Federal Reserve discussed the quantitative easing program at the board’s most recent meeting. The meeting minutes indicate that several of them were concerned that the expectations of investors regarding the program’s cumulative size seem to have increased since last September.

This Tiger Cub Giant Is Betting On Banks And Tech Stocks In The Recovery

D1 CapitalThe first two months of the third quarter were the best months for D1 Capital Partners' public portfolio since inception, that's according to a copy of the firm's August update, which ValueWalk has been able to review. Q2 2020 hedge fund letters, conferences and more According to the update, D1's public portfolio returned 20.1% gross Read More

Wall Street Journal contributor Jon Hilsenrath points to a survey conducted by the Federal Reserve Bank of New York. The survey shows that by the fourth quarter of this year, a majority of investors believe the Fed will still be buying $85 million in bonds every month.

Other surveys show that investors believe the Fed could wind down the program by the fourth quarter of this year and finish it by the first quarter of next year. A survey conducted by The Wall Street Journal indicated that in March about 71 percent of economists believe reductions in the bond purchasing program will be reduced by the end of the year. Sixty-one percent believed it would be finished by the end of the year.

A second survey conducted by The WSJ indicated that as of May, 55 percent believed the quantitative easing program will be reduced by the end of the year, while 17 percent believed it would be finished by the end of the year.

The Fed’s Mindset On Quantitative Easing

Unfortunately the Fed seems to have a different view of what’s going on, which will likely result in volatility in the bond market as investors continue to take guesses about what will happen. While March’s soft jobs report and low rate of inflation seem to have caused investors to believe that the Fed’s program will go on longer, officials believe that we will see employment and market growth pick up by the end of this year. Many officials also don’t believe inflation will continue slowing down.

In the post-meeting statement from the Fed, there was a line indicating that officials would either increase or reduce quantitative easing, depending on how the market evolves over the year. Unfortunately such a vague phrase means that some investors took it one way, while others took it the opposite way.