The Hawaiian Tropic Effect: Why the Fed's Quantitative Easing Isn't Over
Via
Michael
Imagine that the Federal Reserve wants to increase the price of suntan
lotion. There are 10 bottles of Hawaiian Tropic for sale at the cabana.
The Fed buys one per hour until it owns nine. Each time it acquires one,
the price for the remaining bottles rises because people who don’t want
to get sunburned are competing for the dwindling supply. Now that just
one bottle is left, the Fed stops buying. Would you expect the price of
the last bottle to fall suddenly? No—there’s still lots of demand and
constricted supply. Same with bonds. The price of bonds should stay
high—and yields stay low—as long as the Fed hangs onto its huge
inventory.
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