While there is no certainty on what the FOMC will do at their meeting this week, it may be good to review what has happened to the stock market during periods of QE versus periods of no-QE. The table above shades QE1, QE2, Operation Twist, and QE3. There was a overlap between Operation Twist and QE3. We have also highlighted the taper tantrum period and the actual period of tapering.
The markets are facing a new monetary regime where the Fed will try and control the range or freeze short rates between the IOER and reverse repo rate. It will be a new policy choice, and a close look at the past transitions tells us the market does not like these changes. We have already seen the impact on stocks in August.
Stock markets hate change especially when the cost of credit or the availability of reserves declines. The transition to higher rates is a change that will make markets uncomfortable. The action may be delayed but the this transitional date will come.
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