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Will the Fed Land the One-Two-Three Punch to the Markets

Courtesy of Pam Martens

Federal Reserve Chairman Jerome Powell

Federal Reserve Chairman Jerome Powell

Despite President Donald Trump’s leanings toward authoritarianism, he is likely to learn a hard truth this year and next – that the Federal Reserve can make or break his presidency by delivering up to three different gut punches to the markets, which are very likely to spill over into the economy. And without a good economy, even Trump’s most fervent supporters may begin to doubt his omnipotence.

For starters, next Monday the Federal Reserve is scheduled to shrink its purchases of U.S. Treasury securities and Federal agency debt and mortgage-backed securities by another $10 billion a month, from a shrinkage of $30 billion to $40 billion. And by October 1 of this year, the Fed will move from draining $40 billion a month from the markets to draining $50 billion, according to its previously announced schedule. (See chart below.) At the rate of $50 billion a month, that’s $600 billion less in market accommodation from the Fed.

The Fed policy is part of its so-called normalization process to move away from the actions it took to stave off a collapse of the financial system as Wall Street banks cratered in 2008. As a result of its massive bond buying programs known as Quantitative Easing (QE1, QE2 and QE3) the Fed’s balance sheet swelled from $914.8 billion at the end of 2007 to $4.5 trillion in 2014. Its unwinding of its bond-buying program, which began in October 2017, has yet to make much of a dent in reducing its balance sheet, which stood at $4.393 trillion as of its financial report for February 28, 2018.

During his press conference on June 13, the new Fed Chair Jerome Powell mentioned the normalization schedule, stating: “…our program for reducing our balance sheet, which began in October, is proceeding smoothly. Barring a material and unexpected weakening in the outlook, this program will proceed on schedule, and our balance sheet will continue to shrink.”

Powell also mentioned during the press conference how close the U.S. had come to a complete financial meltdown in 2008. He stated:

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