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Ask the expert: What will the end of quantitative easing impact first?

May 27, 2011

By Richard Barrington | MoneyRates.com Senior Financial Analyst, CFA

Q: Now that the Fed has confirmed that quantitative easing will wind down in June, where can I expect to see the effect first: in the stock market, the bond market, or savings accounts?

A: In theory, since quantitative easing was designed to lower interest rates and stimulate the economy, you might expect the program's end to have the opposite effect. This would mean higher interest rates on bonds and savings accounts (as well as other deposit vehicles, like CDs and money market accounts), and slower economic activity which would depress stock prices.

To continue with the theory for the moment, you'd see the effect show up first in bonds and stocks, since these are freely-traded markets which attempt to anticipate financial outcomes. Rates on savings accounts and other deposits change as a result of decisions which are generally made in reaction to conditions after they occur, so the effect of the end of quantitative easing would likely be slower to show up there.

Among deposit accounts, money market accounts tend to be most reflective of investment conditions, and thus may be the first deposit vehicles to start to react. Savings accounts would be next, and CDs, because of their longer time frames, could well be the slowest to react to a change in market interest rates.

What gets in the way of the theory is that the things most sensitive to a change in Fed policy - i.e., the financial markets - also have a number of other things acting on them. So, it is generally very difficult to isolate the effect of any one development on those markets, especially over the long haul. For example, looking at Treasury yields, they actually rose as the Fed policy was going into effect late last autumn, and have been falling lately as that policy is about to wind down - about the opposite of what you'd expect.

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