How Quantitative Easing (QE) Impact the Economy and Stock Market

          Yesterday, the stock market skyrocketed, and the Dow Jones Industrial Average and the S&P 500 recorded fresh new highs after the Federal Reserve provided a pleasant surprise by keeping the asset purchasing program intact. Why the stock market was thrilled about this decision?

QE has been used by central banks to inject liquidity into the economy and stimulate the economy. The Federal Reserve Bank first launched QE 1 in November 2008, and ended it in March 2010.  Then QE2 lasted from November 2010, to June 2011. QE3 was announced on September 13, 2012 to purchase $40 billion worth of mortgage-backed securities per month. On September 21, 2011, the Federal Open Market Committee (FOMC) announced the implementation of Operation Twist. Lastly, on December 12, 2012 the QE4 was declared to increase the bond purchasing amount from $40 billion to $85 billion. The Fed pledged to maintain the QE program until the labor market was improved significantly (6.5% unemployment rate as a benchmark). Thus, it is called QE Infinity.  The market had the best performance of the last 65 years since the QE was implemented in late 2008.

The following table outlines a summary for S&P movement during the QE1 through QE4.

	Time Line	S&P Starts	S&P Ends	Amount	Percentage
QE1	November 2008-March 2010	966	1,169	203	21%
QE2	November 2010-June 2011	1,184	1,320	136	11%
QE3, QE4	September 13 2012-	1,436	1,725	289	20%

Figure 2.1: Performance of the S&P for QE1 through QE4.
S&P data comes from Yahoo Finance historical prices
Note: The data for QE3, and QE4 is based on the data from 9/13/2012 to 9/18/2013.

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