The Federal Reserve meeting starting this Tuesday will mark the future of the markets this week. The key to the meeting, once it is assumed that the first rate hike will be in March, will be in the tone adopted by its chairman Jerome Powell on the balance sheet reduction. This is expected to be moderate to prevent volatility from triggering in the markets
As Joaquín Robles, XTB analyst, recalls, The Federal Reserve holds $8.8 trillion on its balance sheet, more than 40 percent of the GDP of the United States. reducing the balance means stopping buying debt maturities that are coming to an end”.
And it is that never has a central bank owned as much of the bond market as it does now. But this reduction of the balance has to be done at a time when inflation has not stopped rising to the highest level in four decades while the price of oil threatens to reach 100 dollars.
Avoid the taper tantrum (the tantrum of the market)
Reducing your balance is more of an art than a science. As we said, at last count, had $8.7 trillion, or more than $25,000 in the name of every American, and how you plan to remove them from your books will be just as crucial to the markets’ calculations as how many times you plan to raise rates.
“Many?” but also “When?” These are two questions that he will have to answer and with the mission of avoiding the tantrum known by the market as the taper tantrum of 2013 when in 2013 the financial markets “reacted with panic” to the announcement by the Federal Reserve to reduce the purchase of bonds of the program they implemented to inject liquidity into the economy due to the global financial crisis.
As a consequence of this it was in an increase in the yields of US treasury bonds and in a general strengthening of the dollar against the rest of the currencies, revealing that markets were heavily dependent on low rates and liquidity from the Fed.
a different process
The process by which the Federal Reserve will ultimately reduce its balance sheet in the coming months or years will be different than in 2013 and could include direct sales of your bond portfolio.
This idea is defended by Credit Suisse. Its analyst, Zoltan Pozsar, believes that it is the option that gains the most strength to keep inflation at bay.
The last time the Fed undertook tapering, from 2017 to 2019, it chose to shrink its balance sheet by simply not replacing Treasuries and mortgage bonds as they matured. The expectation of most analysts is that policymakers will again follow a broadly similar model, albeit with different timing, i.e. it will not be done slowly and steadily as before..
Rate hike and suspension of your stimulus plan
Runaway inflation has put the Fed, but also the president of the United States, against the odds. Thus, if it is transitory, the idea is that it is more permanent than expected. This will force the central bank to be more aggressive in raising rates.
This will start in March, and there will be increases in March, June, September and December, according to experts at Goldman Sachs.
Also this inflation, which in the United States marked 7 percent, forced, last week, that the country’s president, Joe Biden said he will not continue working on his $2 trillion stimulus plan to avoid new inflationary pressures. This plan was the flagship of the Democrat.