The End Of QE?

by: BigRiverReport

The sell-off in gold, U.S. stocks waffling and U.S. 10-year Treasuries stubbornly holding at 1.7%, the markets could be portending an end to QE.

Richmond Federal Reserve President Jeffrey M. Lacker expressed his views today (4/18/13) on CNBC's Squakbox. Mr. Lacker is a proponent of ending QE earlier than the majority of Federal Reserve Board Governors, and it is interesting that he is making television appearances.

According to the above mentioned CNBC transcript, Mr. Lacker sees the middle of next year (2014) as the most likely time for interest rates to begin rising. If Mr. Lacker is right, the consensus would need to move forward six-nine months. Perhaps, the gold market is making these adjustments.

In any case, the markets have a clear view that, barring a return of economic weakness and with continued current GDP growth trending at around 2%, the end of QE is finally in sight.

Not only is the end of QE in sight, the beginning of the long awaited rise in interest rates is also on the horizon. Maybe not as near as Mr. Lacker predicts (only a little more than year away), but that scenario is possible.

So long as the U.S. economy continues on its current growth trajectory, interest rates will rise. That does not necessarily mean market rates on debt securities will rise, but it's hard to imagine that market rates will not increase, because a higher Fed Funds Rate and a higher Discount Rate will lead to a higher Prime Rate. At a higher Prime Rate, investors will command higher interest rates on loans to consumers and businesses. Therefore, the cost of borrowing money will rise at the bank level, which will most likely spread to the bond markets.

The next question for the Federal Reserve becomes how high to raise the Fed Funds Rate and the Discount Rate. To give you an idea, according to the New York Fed, on June 29, 2006, the Discount rate was set at 6.25%, and the Fed Funds rate was set at 5.25%. The Fed Funds Rate is currently at 0%, and the Discount Rate is at 75 basis points. According to, the Prime Rate on June 29, 2006, was 8.25%. The Prime Rate today (4/18/13) is 4%.

The 2006 interest rates represent a recent cycle peak, so it would take a very strong economy to get us back to these levels, but I don't think it's a stretch of the imagination to see the Prime Rate back at 6% within the next three-four years.

Throw all of the assumptions out of the window if the QE project begins to generate massive inflation. We could see interest rates spike wildly in the market and a repeat of the late 1970s and early 1980s. According to, the U.S. Prime Rate peaked at 21.5% on December 19, 1980.

Throw all of the assumptions out of the window if the global economy cannot recover and deflation persists, in which case we would likely see a continuation of QE and a continuation of the Federal Reserves' low interest rate policies.

At, we work from most likely scenarios. As best we can gauge, the most likely scenario is an end to QE.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.