According to the article On Quantitative Easing, the Federal Reserve decided to take the route of Quantitative easing to lower the interest rate and boost the economic growth. In order to fund this buy back, the Fed has the ability to create money. In addition to its previous holding of bonds, the Fed has almost quadrupled its holding to $ 4 trillion which makes Quantitative easing the most massive economic stimulus program in the world.
As a result of this QE program, the banks had more lending capability which made the interest rate they charge from borrowers to drop and formed the basis for other rates also.
As a result of money supply in the market the value of dollar came down and therefore the investors got attracted to the stock market. On December 18, 2012 the Fed declared that it would cut down its buy back because its economic targets were being met now. This followed Ben Bernanke’s announcement on June 19, 2013 that Fed was considering Tapering which created a panic amongst investors who started selling the bonds and shifted their investment to stocks.
In my opinion the course of action taken by the Fed is justified. QE managed to achieve some of its goal. It restored trust in bank and its operation by removing the subprime mortgage from the balance sheet of the bank. It kept interest rates low, thus reviving the real estate market. It promoted economic growth and also stabilized U.S economy. It provided the funds which in turn provided confidence to pull the economy out of recession. Unfortunately it did not achieve the target of making more credit available. The money provided by it to banks was utilized to triple the stock prices through more dividends or buy back options instead of lending. However due to this stringent lending no inflation was created in consumer goods but it did create asset inflation. As a result of this investors were forced out of bonds and shifted to stock. Had I been an investor I would have done the same.
References...