The Federal Reserve System may be close to the end of its rate hiking campaign based on a continued cool down in inflation, but the central bank has one more policy move that poses a big risk for the stock market.
Ned Davis Research highlighted in a Thursday note that the Fed’s quantitative tightening via its monthly balance sheet reductions could put a dent in stock prices and other risk assets.
Since June 2022, the Fed has reduced its balance sheet by $900 billion to $7.6 trillion, and it would have been even more if the Fed wasn’t forced to inject $400 billion of liquidity to contain the regional banking crisis in March.
As the Fed reduces its balance sheet by letting treasury and mortgage bonds mature (and then not reinvesting the proceeds), it is taking liquidity out of markets.
What does that mean? Find out here: ⤵