Interestingly, the minutes of the Federal Reserve’s May 17 meeting indicated a significant shift away from the idea that QE is
supporting the economy, toward concerns that it is creating distortions:
“There is also concern about the possibility of a breakout of inflation, although current inflation risk is not considered manageable, and of an unsustainable bubble in equity and fixed-income markets given current prices… Net interest margins are very compressed, making favorable earnings trends difficult and encouraging banks to take on more risk. The Fed’s
aggressive purchases of 15-year and 30-year MBS have depressed yields for the ‘bread and butter’ investment in most bank portfolios; banks seeking additional yield have had to turn to investment options with longer durations, lower liquidity, and/or higher credit risk… Uncertainty exists about how markets will reestablish normal valuations when the Fed withdraws from the market. It will likely be difficult to unwind policy accommodation, and the end of monetary easing may be painful for consumers and businesses.”