What Was the Real Purpose of QE?

The story goes that quantitative easing was instituted to “bridge” the financial and economic systems across a “rough patch”.  Via QE, the Federal Reserve conjured new “money” into existence (if we did this, its called forgery…not QE) & exchanged this new “money” to the largest banks for US Treasury bonds and financial assets (Mortgage backed securities).  Banks were left flush with cash, the Fed holding $4.5 trillion in Treasury’s and MBS.  The suggested goal of this exercise was that QE would lower interest rates and this would settle the economic system and subsequently boost asset valuations.

How’d it work out?  As far as asset prices, generally they have soared 300% to 400% but the part about lowering interest rates…not so much.  The chart below shows the Federal Reserve holdings of over 5yr to 10yr US Treasury debt versus the yield on the 10yr Treasury.  The Fed increased its holdings of 5 to 10yr US debt from $100 billion in early 2009 to nearly $900 billion by early 2013…and then lowered it back to just $290 billion currently.  And the correlation on the 10 year yields…essentially zero.

Which is to say, there seems to have been no correlation or even a negative correlation of the Fed conjuring nearly $4 trillion with which to buy (and sell) unprecedented quantities of Treasury’s (particularly the 5 to 10 year variety), and the direction of interest rates.  In fact, the lowest rates seen on the 10 year were while the Fed was systematically rolling off $450 billion in 5 to 10 year debt in mid 2016!  Which leaves a very uncomfortable question…is the Fed filled with the dumbest smart people in America who just haven’t seemed to realize this…or did they have a different goal all along?

QE did have massive impacts, just not where it was “supposed to”.  If the Fed’s goal to was transfer power and wealth to an ever shrinking cohort, seems the Fed has achieved its goal.  My best guess of what QE was all about and who benefitted and continues to benefit…HERE and HERE...to extend and pretend against an ultimately unbeatable foe HERE….


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