Implications of Fed Launching Quantitative Tightening

Fed launching quantitative tightening - 1st time in its history

QT era has extraordinary implications for stock markets and gold

“In October, the Committee will initiate the balance sheet normalization program..."

Fed realizes the extraordinary risk quantitative tightening is for QE-inflated stock markets,

so it is starting slow.

Even so, with two-thirds of the US economy driven by consumer spending, it could spiral out of control.

The Fed denied it was monetizing bonds because QE would only be a short-term crisis measure.

That was a lie.

When the Fed acquires bonds, they are added to its balance sheet.

After QE ended in October 2014, $3.6 trillion in bonds were still on the Fed's balance sheet.

That means over 98 percent of QE money is still in the economy.

It remains so high because the Fed is reinvesting proceeds from the maturing bonds and rolling it over in to new bonds.

That's done in order to keep the money working in the economy.

QT will start modestly in Q4' 17, with the Fed taking $10 billion a month in maturing bonds off its books.

It'll start with a mix of $6b in Treasuries and $4b in mortgage-backed securities.

This will gradually remove capital from the economy.

It will accelerate QT where it'll eventually reach $30 billion in Treasuries and $20 billion in mortgage-backed securities.

That represents $50 billion a month in capital taken out of the economy, or $600 billion per year.

It is unlikely it'll ever reach that level, but that's the stated plan.

Why is it doing this?

It knows there will be another recession coming down the road, and it has to reload in order to provide QE for that one. This is one of the main reasons why there should be no central banking in the world.

It's a major reason the Fed creates booms and busts.

What this means for QT is the Fed, by attempting to prepare for the next recession,
could in reality trigger it.

Assuming it goes ahead and implements its plan, it would take three to four years to complete.

Yellen said there is no intention to changing the depth and pace of QT.

Slowing it in response to a stock sell-off would communicate to the market a lack of confidence in the economy. That in turn would produce more of a sell-off.

The Fed has never done this before. Hang on, this is going to get even more volatile in over the next couple of years.