By Don Schreiber, Jr. – WBI Founder and CEO
The Federal Reserve and its policies have been all over the news as of late. The Fed needs a light flickering-moment, one that sheds light on the effects the balance sheet reduction program has on the markets. In order to get a leg up in the markets, we would have to see a balance sheet adjustment. A policy statement that would indicate the Fed is going to take the pressure off tightening interest rates and the tightening pressure in the markets is necessary.
On Wednesday, January 29, 2019, the Fed released a new statement that did not necessarily clarify a crafted plan to reduce the balance sheet. After the Financial Crisis of 2008, the balance sheet ballooned to $4.5 trillion as the Fed purchased U.S. Treasury notes and mortgage-backed securities in order to support the economy. Now, market participants estimate that the balance sheet should only be reduced to around $3.5 trillion. The Fed “intends to continue to implement monetary policy in a regime in which an ample supply of reserves ensures that control over the level of the federal funds rate and other short-term interest rates is exercised primarily through the setting of the Federal Reserve’s administered rates, and in which active management of the supply of reserves is not required.”1 The Fed also stated that they will continue to monitor changes in the target range for rates as this is the primary way they will adjust their stance on monetary policy. “The Committee is prepared to adjust any of the details for completing balance sheet normalization in light of economic and financial developments.”1 This indicates that the Fed will maintain a larger balance sheet, but they could prepare to alter the balance sheet if future economic conditions warrant it.
Federal Reserve Chairman Powell recently mentioned a few crosscurrents the economy has been facing. The economy in the U.S. is slowing because of the dual tightening program they’ve had, which includes both interest rate hikes and the balance sheet runoff. I believe it is important that the Fed pause so they don’t do any further critical damage to the economy. The main goals of the Fed should be to maintain stable market prices and keep the asset bubbles in tact. They should also keep an eye on maintaining full employment. In January, employment dropped significantly. If the market drops, so does employment. The Fed did agree on Wednesday to maintain the target range for its benchmark interest rate at 2.25%-2.5%, it seems that a lightbulb may have gone off here.
Overall, Chairman Powell and the Fed should maintain the pause they placed on rising interest rates. If the Fed keeps dishing out news that market participants want to hear, I believe markets could go on the upswing.
Past performance does not guarantee future results. The views presented are those of Don Schreiber, Jr. and should not be construed as investment advice. Don
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1 “Statement Regarding Monetary Policy Implementation and Balance Sheet Normalization.” federalreserve.gov, 30 January 2019.