It’s been just over four years since the Federal Reserve announced the first of several rounds of Quantitative Easing (“QE”) programs launching the most aggressive monetary intervention program in U.S. history. Every time one of the QE programs has ended the economy and markets have pulled back. So this last time the Fed stepped back in, it decided to leave the program open-ended.
In case you are wondering how long this round will last? In short, we do not know, however, it may be longer than you can imagine – if history is a guide.
In 1935, at the urging of the US Treasury, the Federal Reserve announced a standing bid for US Treasuries at 2.5% (the price depended on the maturity and coupon rate of the bonds). This standing bid essentially put a floor underneath the price of US Treasury bonds so that any buyer of bonds had limited risk. This was the point. The US government needed bond buyers to be confident of their purchases. This standing bid lasted for 17 years, until 1951.
During this time, inflation fluctuated wildly due to the recession of 1937-1939, the second World War, and the boom that followed that war. Inflation was briefly negative at a couple of points during that time frame, and also reached near 20%. And the yield on US Treasuries never rose above 2.5% because of the Fed.
The point is that Keynes, the noted economist, might have been wrong about many things, but one statement stands out as solid – the markets can remain irrational longer than you can remain solvent. Of course this statement requires an ending phrase – particularly when the market is driven by a guy with a printing press!
Source: Rodney Johnson, HS Dent Investment Management