On paper, the Fed and Bank of England initiated quantitative easing policies to try and keep long-term yields down and to boost the level of aggregate banking sector reserves so as to encourage bank lending. So far, QE appears to be having variable success in achieving these two objectives.
As Stephen Lewis at Monument Securities writes on Thursday, in the UK the 10-year benchmark yield has now risen above the level where it stood when QE was announced. On the banking sector reserves front, meanwhile, there isn’t really enough monetary data for the period since QE began to judge.
But, as Lewis also points out, QE may be having another, perhaps less expected, but nonetheless still very welcome effect – on equities. As he explains (our emphasis):
Possibly, the chief impact of QE will come through the equity market. If ‘other financial institutions’ see their bank deposits increasing, they may be inclined to commit some of these funds to equity investment.
Since QE was initiated, the UK equity market has enjoyed a sharp rally. The Federal Reserve’s purchases of Treasuries may be having a similar effect on US equities. If equity prices are rising, and equity finance is becoming cheaper for companies, this would be a welcome result for UK policymakers. The MPC’s question regarding what happens to capital market values when QE ceases might still be pertinent. However, it might properly relate to equity prices rather than to gilt yields.
Related links:
BoE expands QE - FT Alphaville
The return of the yield? – FT Alphaville
US Treasuries, not treasured by Fed, or Gross – FT Alphaville