The Federal Reserve is due to end a $600 billion government bond buyback program this month but experts tell Barron’s that the Fed’s exit won’t spell doom.
The program, known as quantitative easing, injects money into banks via bond buybacks on the part of the Federal Reserve with the aim of stimulating economic activity.
Stock buyers want more such easing since it pumps up equity prices, although some bond investors worry that such actions pump up inflation rates and eat into their investments.
Whatever happens, experts say, the Fed won’t bolt from the markets and leave carnage in its wake.
The Fed will exit gradually and still service the debt it bought.
Plus the program has pumped enough money into the banks to keep them stocked for some time to come.
"The [stock] market may have sold off [in May] not because of the end of QE2, but because there will be no QE3," says Henry McVey, chief of global macro and asset allocation at Morgan Stanley Investment Management, according to Barron’s.
Others point out market conditions will stick around until the Fed decides to trim its balance sheet and not because the Fed has decided to stop adding to it.
“Think of it as the equivalent of an interest rate cut. The period of easing will only end when that cut is reversed – and for the Fed it will only be ‘ended’ when it seeks to reduce its balance sheet and unwinds its purchases” Chris Tinker, the founder of Libra Investment Services, tells CNBC.
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