The Fed’s “balance sheet reduction” may have profound implications for the dollar, gold, stocks and bonds. We’ll provide an outlook.
It is said forecasts are difficult, especially when they relate to the future. Investors might want to pay attention nonetheless, not so much because I believe I have a crystal ball, but because investing is about managing risk. And there’s a risk that I’m right.
There’s a lot to cover, so let’s start with what is perceived to be the elephant in the room, the Fed. In suggesting that the Fed would soon initiate balance sheet reduction, Fed Chair Janet Yellen indicated it would be like watching paint dry on a wall. Duly observant, numerous pundits agreed. With due respect, that’s a bunch of baloney, but judge for yourself. Unless markets fall apart in the coming weeks, we expect that the formal announcement for the Fed’s balance sheet reduction will be made this September, with a gradual stepping up in the amount the Fed will allow to “run off”, i.e. the amount of maturing bonds it won’t re-invest. The Fed has left many details open to interpretation, but looking at Treasuries alone, at first, $6 billion may be allowed to run off; this is gradually stepped up until $30 billion a month may be allowed to run off. It’s not clear at what duration maturing bonds will be reinvested that are above the threshold, but it is plausible to roll those excesses to “fill the gaps” in subsequent months. Differently said, it’s perfectly possible that the Fed will indeed allow $30 billion in Treasuries to run off once the program is fully deployed:
SGT Report is the corporate propaganda antidote. Providing exclusive original content and interviews with some of the best known voices in the world of economics and precious metals. SGT Report is your daily source for truth in a time of universal deceit.