Quantitative Easement 2021

Quantitative Easement and Tapering

Two financial terms that sound like Dr. Suess and your legal counsel cooked up in a New York polysci think tank.

Today we’re going to make them simple.

Quantitative Easement is when the Federal Reserve purchases our own Bonds, primarily composed of MBS, or mortgage-backed securities.  Purchasing amounts per month historically vary between 60 billion and 140 billion USD.  Essentially, when the Federal Reserve buys our own debt, instead of other countries, we can lend money to ourselves and pay it back at low-interest rates.

It’s proven an effective tactic at keeping our interest rates low during the fallout from the financial crisis of 2007, and now is being implemented again due to the recession created by the COVID 19 global impact to stimulate our economy.

But it can’t go on forever.  Inflation, global markets, GDP, job growth, and non-artificial economic stimulus will bring about our next term, “Tapering.”

Tapering is when the FED MoM (month over month) incrementally decreases the amount it is purchasing its own bonds, usually in denominations of 20 billion USD until we are no longer purchasing our own debt.  They “Taper” the purchase of our own bonds because if they were to stop in a single month, the economic shock of no longer pumping money into our economy would theoretically create market crashes and whiplash that could prove economically catastrophic.

Instead, tapering allows our economy to recover gradually in other indexes, like commodities of lumber, farm goods, manufacturing, and other tangible sectors, to regain traction in our GDP, or Gross Domestic Product.

When tapering happens, rates go up because it usually is a sign of the Fed adjusting to inflation, which should be attached to growth.

Keep in mind this blog and video were made two weeks before the FOMC meeting – when the “Tapering” word was dropped by the FED, rates went up nationwide by .80 bps.

Keep your heads on a swivel and stay tuned for more relevant and useful market prognostication and explanation!