And now it begins - the "QT" era, that is. After spending nine years doing everything it could dream up to keep the U.S. economy from entering a disinflationary spiral, the Fed will officially begin to "unwind" its balance sheet next month.
In an attempt to return both the central bank's monetary policy and bond holdings back to more normalized levels, Janet Yellen announced yesterday that (a) the current view of the economy and, in turn, the plan for "policy normalization" (aka rate hikes) remains the same and (b) the FOMC will stop reinvesting the interest it receives from its portfolio holdings in October. This means that $6 billion in Treasury Bonds and $4 billion of MBS (mortgage-backed securities) will mature each month. The plan is to then increase that amount by $10 billion a quarter to a maximum of $50 billion a month by October of next year.
The first takeaway here is that the Fed FINALLY feels like it can step away from the life support it has been providing to the economy for nearly a decade. According to Ms. Yellen, "The basic message here is U.S. economic performance has been good." The Fed Chairwoman added at Wednesday's press conference, "The American people should feel the steps we have taken to normalize monetary policy... are well justified given the very substantial progress we've seen in the economy."
The plan is to slowly reduce the Fed's more than $4 Trillion portfolio back to a more reasonable size over the next few years. Instead of continually pumping new cash into the financial system, the Fed wants to get back to "normal" and let markets work on their own. Of course, what this "normalized" level looks like is yet to be determined. And as such, the guessing game for investors about ...