Fed buys bonds, but stocks are the real target
THOUGH FINANCIAL MARKETS INITIALLY were nonplussed by the Federal Reserve's well-anticipated announcement of $600 billion in new securities purchases, they eventually got the message: The aim of the second phase of quantitative easing is to boost prices of risky assets such as stocks and to lower their risk premiums. After an initial dip following the mid-afternoon announcement of QE2, major U.S. stock averages moved into positive territory to end Tuesday at two-year highs. (QE2 refers the second installment of the Fed's quantitative easing after the first round of $1.7 trillion in securities purchases initiated in March 2009. That's the last time I'll bore you with that.) Perhaps more extraordinary was the collapse in the VIX, the CBOE's volatility index on the Standard & Poor's 500, which plunged nearly 10% following the Fed announcement. With the Fed slated to scoop up over $100 billion of Treasuries a month through mid-2011, sellers of those riskless securities will have all that dough to put to work, presumably in risk assets such as stocks, to keep them well-bid.