Fed holds rates, sets date to unwind $4.5 trillion balance sheet

[Blue Collar Guy]

OK, In layman's terms what will this do to stocks and bonds?

 

[joeea]

OK, In layman's terms what will this do to stocks and bonds?

I predict that some will go up, and some will go down.

But that's just my guess...

 

[MichaelB]

I predict that some will go up, and some will go down.

And I think just the opposite will happen.

 

[Nemo2]

And I think just the opposite will happen.

Good enough for me....you can't both be wrong.

 

[NW-Bound]

OK, In layman's terms what will this do to stocks and bonds?

Both stock and bonds will crash. ER's will either have to claim SS early, or dust off their resume to go back to work, or apply for jobs at Walmart.

Oh, but people will say that this should be all anticipated and built-in to the price of assets already, so maybe things may just tread water.

Anyway, this morning I went with my wife for a grocery run, got home at around 11:30AM local time, checked my stocks and saw that I was down more than $12K. Wow! Have not had a day this bad recently.

Must have something to do with the Fed, but could not investigate right away as I needed to go to Home Depot to get some lumber to bring up to the boondocks home soon for a project.

Came back home after the market closed, and saw that the market recovered, and I am down only $339 for the day, but this is before MF reporting.

Market volatility is back. Fun time!

 

[LRDave]

It doesn't look like it did much today one way or another.


I wish they'd unwind more quickly.

 

[audreyh1]

Both stock and bonds will crash. ER's will either have to claim SS early, or dust off their resume to go back to work, or apply for jobs at Walmart.

Oh, but people will say that this should be all anticipated and built-in to the price of assets already, so maybe things may just tread water.

Anyway, this morning I went with my wife for a grocery run, got home at around 11:30AM local time, checked my stocks and saw that I was down more than $12K. Wow! Have not had a day this bad recently.

Must have something to do with the Fed, but could not investigate right away as I needed to go to Home Depot to get some lumber to bring up to the boondocks home soon for a project.

Came back home after the market closed, and saw that the market recovered, and I am down only $339 for the day, but this is before MF reporting.

Market volatility is back. Fun time!

Wow, if you haven't been down more than $12K in a day in stocks for a long time, volatility has been super low!

 

[audreyh1]

Some interesting things.

• They start the unwind in October this year rather than December.
• The skipped an interest rate rise this time, implied one for December, and indicated maybe one fewer less year than expected. Overall fewer rate rises than expected.

I'm not sure these specifics were baked into the markets, so maybe the markets need more time to digest these details.

It does seem to signal slightly less confidence in the US economy.

 

[Looking4Ward]

It does seem to signal slightly less confidence in the US economy.

I listened to Yellen's entire spiel and got the opposite impression. She essentially said the economy is making solid gains and that's expected to continue. That was about the same time markets reversed their drop and gained everything back:

 

[audreyh1]

I listened to Yellen's entire spiel and got the opposite impression. She essentially said the economy is making solid gains and that's expected to continue. That was about the same time markets reversed their drop and gained everything back:

They had planned to be a bit more aggressive with rate rises and dialed back slightly. I don't think Yellen would downtalk the US economy at this point. Solid gains is a wide range.

 

[jim584672]

10 billion a month ramping up to 50 billion a month has got to be deflationary and will contract the money supply. QE was like rocket fuel for the markets, this is QE in reverse. Uncharted territory ahead.

 

[Totoro]

+1

Simplified: Fed buying bonds with newly created money == more dollars in circulation == inflationary push. It's an untested way solving the problem of how to lower interest rates below zero.

So the inverse should mean: deflation push. Since we are approaching the 2% inflation target this might be a good time to start doing that. Note that it is not actively unwinding: the Fed just stops buying and doesn't renew debt, resulting a natural wind down. In terms of interest rates: it should push them up as well.

For bonds this is not so good news in the short term, for stocks it depends, but generally also not so favorable. Which is why they are only doing it now: with a robust economy the hits are easier to absorb and might actually be flattened out by growth.

But in the end: nobody really knows. Most are advising to keep bonds short in duration, and beware interest sensitive industries (real estate) a bit more than usual.

 

[NW-Bound]

Wow, if you haven't been down more than $12K in a day in stocks for a long time, volatility has been super low!

You made me having 2nd thoughts. So, looked at my records.

On Aug 17, 2017, I "lost" almost $30K (but I have set new highs since). That's only 1 month ago

My "superior memory" is getting shot!

 

[Blue Collar Guy]

10 billion a month ramping up to 50 billion a month has got to be deflationary and will contract the money supply. QE was like rocket fuel for the markets, this is QE in reverse. Uncharted territory ahead.

+1

Simplified: Fed buying bonds with newly created money == more dollars in circulation == inflationary push. It's an untested way solving the problem of how to lower interest rates below zero.

So the inverse should mean: deflation push. Since we are approaching the 2% inflation target this might be a good time to start doing that. Note that it is not actively unwinding: the Fed just stops buying and doesn't renew debt, resulting a natural wind down. In terms of interest rates: it should push them up as well.

For bonds this is not so good news in the short term, for stocks it depends, but generally also not so favorable. Which is why they are only doing it now: with a robust economy the hits are easier to absorb and might actually be flattened out by growth.

But in the end: nobody really knows. Most are advising to keep bonds short in duration, and beware interest sensitive industries (real estate) a bit more than usual.

Thank you both, These are the things I wanted to learn about.

 

[Senator]

OK, In layman's terms what will this do to stocks and bonds?

They will either go up, or down. Unless they stay the same. Or a combination of all three, depending on your time frame.

 

[audreyh1]

You made me having 2nd thoughts. So, looked at my records.

On Aug 17, 2017, I "lost" almost $30K (but I have set new highs since). That's only 1 month ago

My "superior memory" is getting shot!

LOL!

 

[Blue Collar Guy]

They will either go up, or down. Unless they stay the same. Or a combination of all three, depending on your time frame.

I think 2 guys beat you to this answer, I thought maybe it was like a nuclear attack against a country, In that case I would think stocks would plummet. Since I never even knew what QE actually did, but everyone said its propping up the market, I thought this would lower the market.

 

[audreyh1]

I think 2 guys beat you to this answer, I thought maybe it was like a nuclear attack against a country, In that case I would think stocks would plummet. Since I never even knew what QE actually did, but everyone said its propping up the market, I thought this would lower the market.

It probably will ....... eventually ........

that's the rub!

The punch bowl is slowly being drained. But the party might last for a while.

 

[Blue Collar Guy]

It probably will ....... eventually ........

that's the rub!

The punch bowl is slowly being drained. But the party might last for a while.

Ahh, OK.

 

[GrayHare]

Then: Fed boosting money supply. Yay, more money for everyone! Stocks go up.
Now: Fed reducing money supply. Yay, economy must be good! Stocks go up.
Future: Fed increasing interest rates enough to finally tame inflation. Boo, economy will be cooling. Stocks go down.

 

[Blue Collar Guy]

Then: Fed boosting money supply. Yay, more money for everyone! Stocks go up.
Now: Fed reducing money supply. Yay, economy must be good! Stocks go up.
Future: Fed increasing interest rates enough to finally tame inflation. Boo, economy will be cooling. Stocks go down.

I like the first 2, its the last one that isnt too cool.

 

[Running_Man]

The amount is 10 billion per month for the next 3 months. When the debt ceiling was raised magically the next day 120 billion of debt was added to the national debt so the amount the FED is reducing is not even noticeable to the amount of actual debt there is, to try and assign what can happen as a result from that one action is extraordinarily difficult. Actual actions from smoke and mirrors are difficult to differentiate. For now we continue to be range bound as we have for years on end, I am expecting that to end shortly but the markets will let us know soon enough, then the explanation can be assigned after the fact.

 

[GrayHare]

Historically the inflection point for stocks has been the 10-year Treasury at 5%. That means stocks are likely to continue to do well as that rate rises to 5%. Historically when that rate increases past 5% stock prices decline. At a very basic understanding level that makes sense because as bond rates increase more investors sell stocks and switch to bonds. Five % has been the tipping point at which so many stock investors sell that stock prices decline. We've been at low bond rates for so long, IMO this time that tipping point from stocks to bonds might happen sooner, maybe at 4.5% or 4%. I doubt it happens sooner than 4% because I don't put much belief in "This Time It's Different".

 

[audreyh1]

Historically the inflection point for stocks has been the 10-year Treasury at 5%. That means stocks are likely to continue to do well as that rate rises to 5%. Historically when that rate increases past 5% stock prices decline. At a very basic understanding level that makes sense because as bond rates increase more investors sell stocks and switch to bonds. Five % has been the tipping point at which so many stock investors sell that stock prices decline. We've been at low bond rates for so long, IMO this time that tipping point from stocks to bonds might happen sooner, maybe at 4.5% or 4%. I doubt it happens sooner than 4% because I don't put much belief in "This Time It's Different".

I'm inclined to believe the tipping point might be 10 year treasuries exceeding to 3%. At least that's what bond guru Gundlach opined about a year ago.

But it might stil take a really long time for 10 year treasuries to reach 3%. With inflation and GDP stuck where we are, it's hard to see it soon.

On the other hand, if we suffer a very overdue recession that will bring stock prices down while keeping interest rates low.

 

[brucethebroker]

Great blog on this topic yesterday.

wolfstreet.com/2017/09/20/this-fed-is-on-a-mission