What exactly does the "Fed is shrinking it's balance sheet" mean ?

K

kandlekid

What exactly does the "Fed is shrinking it's balance sheet" mean ? I imagine it has something to do with the national debt, but I have to admit, I'm mostly in the dark. And what does it mean for investors ?
 
Stockolio said:
https://www.investopedia.com/terms/f/fed-balance-sheet.asp
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From the bottom paragraph (possibly quoting Brookings): "Like any entity, the Federal Reserve has liabilities (mainly money that commercial banks have deposited at the Fed plus outstanding currency) and assets (mainly U.S. Treasury debt and mortgage-backed securities.) What makes the Fed unique is that it can expand its balance sheet at will by (electronically) printing money (technically, bank reserves) and using that money to buy Treasuries in the open market."

So if you invert that, the Fed shrinks it's balance sheet by selling Treasuries (or its corporate paper and MBS purchases) in the market, diluting existing supply, and causing interest rates to climb. As this makes "safe paper" more attractive, the risk profile for Blue Chip "widows&orphans" stocks will change, and on down the equities. Basically, by adding to/restoring the full range of low-risk asset choices, prices for all the others will be lowered.

(This of course being the inverse of what the Fed contributed to stabilizing the market a decade ago: prices were plummeting, and the Fed stepped in to buy the lowest-risk end of the market, diverting the market's capital-return-seeking dollars into the stock market.)
 
All the treasuries/ bonds that the fed purchased actually helped reduce rates. Now that they are selling them, more supply means higher rates.
 
kandlekid said:
What exactly does the "Fed is shrinking it's balance sheet" mean ? I imagine it has something to do with the national debt, but I have to admit, I'm mostly in the dark. And what does it mean for investors ?
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%%
Bear trend is your friend,:cool::cool: stocks, ETFs
 
fiat currencies are all nonsense.the actions of the Fed are self defeating resulting in inflation. the rise of crypto currencies over 5 year period is proof that people are looking for alternatives
 
Possibly, ranges of interest rate spreads , uS GDP, global growth have/will be/been dampened . Absolute numbers we are used to historically, may not be markers anymore.
A relative game where small changes lead to oversized reactions.
A levered , indebted, borrowers world.
A mild level of uncertainty, unknown may cause large swings.

Maybe a 3 step .75% ease in absolute fed funds rate and language/bias change in 2019 will
turn around a 30% washout with new highs to follow in stock indexes...participate today/prepare for tommorrow.

Or not, and a financial crisis/solvency /liquidity/credit crash is in the breeze and we are all toast.
Merry Christmas!
 
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