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Markets shake as Federal Reserve money printers subside | News

The instability that is hitting New York-Wall Street is not only because the Federal Reserve money printers that support the market are slowing down, but also that it may soon reverse.

With high inflation and a stronger economy, the Fed warns investors that the very simple conditions created in recent years may disappear. It expects to raise short-term interest rates faster and more aggressively than previously expected, and could soon begin to give up some of the trillions of dollars it bought since the pandemic began.

The first possibility will be negative for Wall Street, but it’s investor-prepared. But the second possibility was a surprise when it was included in the minutes of the Fed’s latest policy meeting released on January 5.

The S & P 500 fell nearly 20% in the last three months of 2018 as the Federal Reserve reduced a large herd of bond holdings and raised short-term interest rates at the same time. In 2019, when Powell didn’t recover until after a sharp turn in January, the Fed said it was “patient” in its policy of withdrawing some of the stimulus it had injected into the market.

“These are the flashbacks that the market is currently holding, and I’m wondering how long it will take for the punch bowl to actually be taken away. Investors should now position it for that,” BMO Wealth Management said. ..

Investors have only recently become accustomed to the idea that the Fed only delays monthly bond purchases. Since the early days of the pandemic, central banks have generated funds to buy bonds in the hope of keeping long-term interest rates low and revitalizing the economy. This practice is called “quantitative easing” by economists. More colloquially, it is called “printing money.”

Bond purchases and record low short-term interest rates of nearly zero have helped boost prices across the market in recent years. Also, investing has become much easier, and relatively shallow scary patches have cost a lot of money. Along with a suite of easy-to-use trading apps, it helped bring a new generation of investors to market. What are their rewards? If they simply bought the S & P 500 Index Fund and used it last year, they earned almost 30 percent.

But now that the Fed plans to close bond purchases in March, the market is hoping for a sudden shift to “quantitative tightening” rather than just a “taper” of purchases.

For example, after the Fed’s minutes were released, BNP Paribas economists raised expectations that the Fed announced a quantitative tightening in July and would start in August. Earlier, they predicted the start of spring 2023.

According to Deutsche Bank economists, the Fed has the potential to save $ 300- $ 400 billion from its balance sheet in the second half of 2022. It could save another $ 1 trillion in 2023, which is about the same as two short-term interest rate hikes. price.

“We will be able to move a little faster and a little faster than last time,” Powell said on Tuesday about quantitative monetary tightening. “It will be clear soon.”

When the Federal Reserve finally began to shrink its balance sheet, it waited almost two years after the first rate hike. This time it could be within a few months.

When asked by U.S. Senators whether the Fed will simply roll off its balance sheet at bond maturity or take additional steps to actually sell the bond, Powell has yet to make a decision. Said.

The Federal Reserve did not do that last time, but Powell said the conditions were different this time. For one thing, the Fed’s balance sheet is trillions of dollars larger than last time. Inflation is also much higher this time, with Wednesday’s report on the consumer price index up 7% from last year’s levels.

“And the economy is much stronger,” Powell said. “It’s a very different situation.”

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Markets shake as Federal Reserve money printers subside | News

Source link Markets shake as Federal Reserve money printers subside | News

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