It's the Fed, Yanking the Punchbowl

bee

Interesting read as the author compares and relates how the Fed has impacted the rise U.S. Equity markets with QE1,2, and 3.

We are now in the unwinding of Fed bond purchases that were made during 2009-2014. This process will ramp up going forward Quarter by Quarter.

From the article:

Last year, the Federal Reserve under Janet Yellen announced plans to start liquidating those bond and MBS holdings, starting at a rate of $10 billion per month in Q4 of 2017, and ramping up that rate by an additional $10 billion in every quarter to follow. So the target rate of sales for Q1 2018 is $20 billion per month, and it is supposed to ramp up to $30 billion per month in Q2, then $40 billion per month in Q3, eventually peaking at a $50 billion per month rate in Q4 and beyond.

Selling bonds into the open market means that the banking system has to give up “money” to pay the Fed for the bonds and MBS that the Fed is selling. I’m not going to get into a discussion about the various definitions of “money”, and how it is all just a ledger exercise. But it is clear that the selling of bonds by the Fed reduces the amount of liquidity in the banking system, which has effects on the ability of stock prices to remain at lofty levels. And it probably does not help to have the Treasury Department doing its own bond sales at a higher rate.

Link:
learning_center-its_the_fed_yanking_the_punchbowl