What Long Term Quantitative Easing Means for Your Portfolio

This morning, the US Federal Reserve's Federal Open Market Committee announced that, as expected, it would maintain the target range for federal funds and keep in place its "full range of tools" for maintaining the functioning of credit markets and the financial system as a whole.

• You can read the full FOMC statement here, but be advised: it's not exactly a page-turner.

With the coronavirus pandemic still in full swing in the United States, nobody really expected anything different from the country's monetary policy authority. The FOMC has made clear that it will stay the course until conditions improve dramatically, and since a workable vaccine appears to be at the very least months away, a question is raised: what are the long term effects of quantitative easing?

Too Much Money Chasing Too Few Assets

The primary negative byproduct of sustained quantitative easing is a disruption in the supply and demand relationship between money and everything else. In the short term, this can be easily absorbed: the conditions of the crisis discouraged spending, so the money added to the economy didn't immediately go chasing assets. As time wears on, however, spending has crept upwards and upwards, and we could see prices start to rise and inflation to start in earnest.

We haven't seen significant inflation in 2020, as massive job losses and economic precarity have kept inflation down. However, those measures of inflation are based on a basket of goods that consumers buy, and consumers are typically the last to feel the effects of monetary policy. If we shift our focus from the prices in the grocery store to the prices in other markets, we do start to see significant price changes.

Firstly and most dramatically, the yields on treasury securities (which is inversely related to price) have fallen remarkably since the pandemic started. Here's the yield curve today, the yield curve in March, and the yield curve this time last year:

Source: Bloomberg

And here's how the price of gold has changed over the last year:

performed over the course of 2020:

Source: Bloomberg

Both are very significant changes. The yield curve, which typically inches around as it reflects the broad risk/return relationship in a huge economy, fell off a cliff. Gold ran up 29% in just under 8 months, a spectacular return that was probably beyond the most bullish gold analysts' projections.

While the prices of goods that consumers buy haven't risen in 2020, the prices of the stuff those closest to the US Federal Reserve's money cannon like to buy certainly have. We expect those trends to continue for at least as long as monetary policy makers stay their current course, which means that interest rates could remain low for a while.

Low Interest Rates Require Good Cash Management

One point we're trying to impress on our clients is that the difference between good cash management and mediocre cash management has never been wider. Since rates on overnight deposits are so low, every dollar that's unnecessarily kept in those accounts carries huge opportunity costs. Your Investment Advisor should be able to provide not just competitive rates at today's prices, but also:

• Help with precisely modelling your cash flow and liquidity needs;

• A range of options beyond the usual HISAs, cashable GICs, and fixed-term deposits.

In times like these, you should be able to expect your advisor to act as more than just a broker or middleman. Getting the best rate on a deposit doesn't help if it's not the right strategy for your cash portfolio.

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