Quantitative easing served to raise asset prices across the board, particularly of companies in the tech sector. As that policy is reversed, can we expect asset prices to fall?
Whatever one’s opinion about quantitative easing as a government policy, there’s no doubt that it served to raise asset prices across the board, particularly of companies in the tech sector. Apple and Amazon are great examples of this, both climbing to market caps in excess of $1 trillion before falling back down. Many companies in the tech space are very successful because they are innovative and have developed completely new ways of doing business.
Initially, the focus of QT was on short-term fixed income securities but in subsequent rounds the policy became increasingly aggressive with a focus on longer-maturity securities. The government was buying any and all things it could, including mortgage-backed securities , to try and repair the damage. Then, it started to bail out specific companies, with the US government picking winners and losers by buying equity in all the major banks as well as companies like GM, Chrysler, and AIG.
The US economy is in much better shape. We’ve seen 10+ years of growth, including the longest equity bull market in history. Inflation seems to be in check while unemployment has dropped to a 50-year low of only 3.8%. In normal times, we’d see the Fed move to raise interest rates, which they’ve done nine times since 2015, but in January the Fed announced that it will pause on future rate increases for now.
In much the way that QE started small and got out of hand, the same seems true with QT. Janet Yellen and then Jerome Powell tried not to upset the markets by telegraphing their plans well in advance. Since QE had never been tried before, they wanted market participants to broadly know how the balance sheet would be slimmed down.
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