Why does easing boost the stock market?

The theoretical basis is that QE will lower interest rates on government securities, which forces investors to move out the risk curve. QE occurs because short-term interest rates are already at the zero bound and the Fed must move out the curve to have something to work with. To illustrate it in a very simple way, the Fed buys treasuries and lowers the return for a new buyer, so the treasury guy looking for a certain rate of return moves into MBS, the MBS guy moves into HY, the HY guy moves into equities. Increasing risk-taking activity stimulates the economy as more money is available for investment, and as asset prices increase, the wealth effect boosts consumer confidence. By targeting mortgage-backed securities in addition to treasuries, they hope to lower the cost of owning a home, bolstering the housing market. Finally, while they will never admit this, by increasing the monetary base of the USD, it decreases the value of the USD compared to other currencies, which makes American exports more competitive, and has a mildly inflationary effect by increasing the cost of imports.


Excellent analysis! they asked bernanke about inflation and he said it wont be an issue BC he can increase the interest rates on treasuries, a power the fed previously didnt have.


Whenever QE is expected, the market rallies. Can someone explain why that is? I don't quite understand it. Is it because the market expects people to move into equities and away from bonds?