An End to QE: Why the Fed Is Pulling the Plug on Bond Purchases

An End to QE: Why the Fed Is Pulling the Plug on Bond Purchases

After six years of doling out booster shots to the U.S. economy, the Federal Reserve announced on Wednesday that it was finally ending quantitative easing, the ongoing stimulus campaign it began during the height of the economic downturn.

QE, as it's commonly known, is the practice of the government injecting money into the economy by buying bonds from banks. This, in turn, bolsters the banks’ reserves, which help lower interest rates, facilitate more loans and, ultimately, stimulate consumer spending.

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Now that the Fed believes the economy is on the upswing, it no longer sees the need to continue the bond buybacks—which have swelled the Fed's assets by more than $1 trillion.

“There has been a substantial improvement in the outlook for the labor market since the inception of [the] current asset-purchase program,” the Fed said in a policy statement. "Moreover, the Committee continues to see sufficient underlying strength in the broader economy to support ongoing progress toward maximum employment in a context of price stability."

Translation: The job market is getting better and the economy is on the mend, so we can take it off life support.

Some pundits, however, think that the end of QE could mean slower growth for the economy, which could lead to more volatility in the markets as investors lose confidence.

That, however, shouldn't be a big cause of concern for the average investor, says Tom Gilmour, CFP® with LearnVest Planning Services, who recommends that people stick to their investment strategy and continue to make their regular contributions. Even if there are dips in the market, "you can think of it as buying shares while they are on sale," he says, which is a strategy known as dollar-cost averaging.

The other thing to keep in mind is that you can always revisit your portfolio if you think volatility has thrown your investments out of whack. "Asset allocation is one of the biggest drivers of your returns, so after big market swings, review your accounts and rebalance to try and get back to your target allocation," Gilmour adds.

Curious to find out more about how QE and other economic trends affect your personal finances? Read more about how macro factors can impact your everyday life here.

LearnVest Planning Services is a registered investment adviser and subsidiary of LearnVest, Inc., that provides financial plans for its clients. Information shown is for illustrative purposes only and is not intended as investment, legal or tax planning advice. Please consult a financial adviser, attorney or tax specialist for advice specific to your financial situation. Unless specifically identified as such, the people interviewed in this piece are neither clients, employees nor affiliates of LearnVest Planning Services, and the views expressed are their own. LearnVest Planning Services and any third parties listed, linked to or otherwise appearing in this message are separate and unaffiliated and are not responsible for each other’s products, services or policies.

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