The End of QE2

Impact on commodity prices and interest rates

Interest rates are likely to rise as QE2 comes to an end.  This also puts pressure against commodity prices including food and oil.  A rebound in the dollar is also a possibility.

It seems there is little political will for another round of QE in the near future (unless the economy stalls again).  QE2 was highly criticized by many in the financial media.  Its impact was mainly felt by consumers buying food and energy.  Higher interest rates resulted which was what QE2 was implemented to prevent. 

Because of the extra liquidity, the excess money ended up in emerging market equities, commodities, and the US stock market.  This policy led to excessive speculation in the financial markets.  Instead of getting more lending into the hands of businesses, investors sought to protect themselves from a weak dollar. 

Too Much Debt

The root of financial problems throughout the world has been too much debt.  We are solving our debt problems by adding more debt.  That is, as consumers pay off their debt, the government is racking up more debt at the same time. 

Why Interest Rates May Rise

The Federal Reserve has been buying treasuries with the intent to keep rates low.  Since prices move inversely to yields, the Fed bids up the price of treasuries.  When QE2 ends, the treasury will have to rely on the free market to buy treasury bonds.  It will then be a matter of what price the market will settle for.  The prices are likely to drop as investors should require higher yields.  Equity markets around the world may also see a correction.

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