Quote:
Originally Posted by Rustic23
I don't understand the reasoning that the financial markets are large and would have little effect and yet they want to save it for future QE. Why would that have any effect? Seems to me it QE worked to loosen the markets, and I certainly heart 'Don't fight the FED' enough, than unwinding the balance sheet would tighten it.
Not posted for argument, just don't understand what appears to be two sides of same coin.
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I think the balance sheet reductions will have a tightening effect. It is the scale of the effect that people are unsure of. A quick Google check shows that the NYSE stock market alone is worth $18T, the NASDAQ is at about $7T and the US bond market is $31T. the Fed is talking about a $2T reduction over a few years. So it's noticeable, but not overwhelming or overpowering in any way.
What I meant about future QE is that I think the Fed would rather face the next significant financial adverse event with a balance sheet that is at $2T rather than $4.5T. Because it gives them more flexibility and tools in terms of how they respond - the Fed would have that $2.5T extra runway of QE available to them. There were concerns about two years ago when Fed rates were near zero and there was the possibility of deflation and people were concerned that the Fed couldn't become any more accomodating because they thought the Fed couldn't go below zero. (They could I think, but some people were worried.) The Fed doesn't want to be backed into a corner and lose the confidence of the investing world.
Hope that makes more sense.
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