USA Extends QE Markets Soar

USA Extends QE Markets Soar.

Stock markets have soared around the World overnight following the US Federal Reserve’s (USA equivalent of the Bank of England) to maintain and not scale back its quantitative easing (QE) programme next year.

Since May, Bernard Bernanke, the Federal Reserve chief has been talking up the likelihood of phasing out QE and markets reacted poorly in late May and early June.  The Fed has ever since been talking about maintaining it or slowing down its stimulus but at a lower rate.

The Fed now suggests that the US economy has slowed a little and it has cut its growth forecast for this year from 2.6% to 2.3% hence continuing with its economic stimulus valued at around $75bn per month.

What does this mean in plain English?

Quantitative Easing (QE) means a country’s central bank is buying back its debt.  Countries borrow money from investors, banks, pension and insurance companies to fund government projects.  These are known as Bonds or Gilts and the said government pays either fixed rates of interest or inflation linked interest (the coupon) and the capital is guaranteed to be paid back in full at maturity i.e. at par.  Usually Gilts and Bonds are considered safe haven investments as they are government backed with guarantees.  QE is where governments buy back their debt at market rate.  This means investors such as banks, insurance and pension funds are getting a market value price for their gilts and bonds and billions of pounds, euros and dollars are released back into the economy.

More money in the economy means inflation.  It also means there is more capital available to lend, to borrow, to invest.  This drives markets up.

The US announcement that it will not phase back its huge QE programme has boosted markets.  At the time of writing (Thursday Morning) US Markets had closed up, before the QE announcement but this morning FTSE 100 was up 1.42%, German DAX up 1.26% and French CAC up 1.32%.  Across the globe, Hong Kong up 1.79%, China 1.46%, Indonesia 6.08% and Japan up 1.80%.