The Federal Reserve hiked rates a quarter point on Wednesday, June 14, 2017, and communicated how they will unwind their massive $4.5 trillion balance sheet. The Fed balance sheet normalization impact will be negative on the economy.
The Federal Reserve communicated to markets how it plans to normalize its balance sheet. They will stop reinvesting in TSYs at $6 billion per month and MBS’ at $4 billion per month. This makes a total of $10 billion per month less in reinvestments. The Fed will increase this in 3 month intervals over the next year until it reaches a total of $50 billion per month.
Fed Balance Sheet Normalization Impact
Janet Yellen said at the press conference after the rate hike announcement today that this unwinding of the balance sheet will not have any impact on markets and it will just run in the background. It will be so gradual and slow that it will be like watching paint dry.
One does not simply reduce a $4.5 trillion balance sheet “in the background”, like paint drying. Of course that’s what Yellen has to say so as not to pop the giant delicate bubble created from years of QE.
Make no mistake. If buying $4.5 trillion worth of assets across the US economy helped, then selling $4.5 trillion worth of assets across the economy will hurt it. You can’t have it both ways. Logical necessity dictates that Fed balance sheet normalization impact will be the opposite of QE. This is QT (Quantitative Tightening).