Thursday, August 12, 2010

The Impact of Quantitative Easing

As expected, the Fed announced that it was going to buy Treasury bonds on Tuesday, engaging in the kind of quantitative easing we discussed earlier this week. And still, the Dow fell by more than 250 points on Wednesday. Does that mean the Fed's decision was a bad move? Not necessarily. There are several competing explanations:

* Investors saw the Fed's move as not significant enough to strongly affect the overall economy.

* Investors, anticipating the Fed's quantitative easing, had already factored that into their pricing decisions before Wednesday's drop.

* Bad economic news out of China and Japan, which caused a drop in the Asian markets, affected prices here as well.

All of these certainly had some impact on the Dow over the past couple of days. As is the case most of the time that the Dow has an eventful day, it's hard to pinpoint an exact cause. It's possible the markets didn't like the Fed's move, but there's no way of knowing for sure.

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