The Federal Reserve (Fed) has announced it will now expand quantitative easing (QE) aggressively this week – purchasing USD 125 billion each day of treasury, in addition to mortgage-backed securities and corporate bonds in the both the primary and secondary markets. This means the Fed will perform QE to the extent of USD 625 billion in one week, surpassing what they did in their second QE purchases, where they bought USD 500 billion over seven months. Unprecedented times clearly call for unprecedented action.
The markets initially rallied on the back of this additional QE news, but they are now fading again. The concern is that this pressing of the monetary nuclear button might delay or even stop any fiscal stimulus that remains stuck in political gridlock. Until we see the fiscal lever pulled, we believe the direction of markets to ever increasingly desperate Fed announcements can only be downward.