Fed To Start Tapering – Don’t Be Afraid, the Party Will Continue in the Markets
Stock markets will continue to set new ATHs in the coming weeks.
It was expected for several weeks. The Fed just announced that it would start its tapering later in November. All investors were waiting for Jerome Powell's announcement, and they got an important confirmation: the magic money will continue to flow on the financial markets.
This statement may seem surprising to you when the Fed has just announced to start tapering. However, you need to look beyond this statement to see what's behind it.
Liquidity injections into the markets have caused the Fed's balance sheet to explode over the past 18 months
Since the beginning of the COVID-19 pandemic, the Fed has been pursuing an ultra-accommodating monetary policy that has been built around two strong pillars: zero interest rates and a massive asset repurchase program of at least $120 billion every month.
This relentless injection of liquidity month after month has caused the Fed's balance sheet to rise phenomenally, now exceeding $8.5 trillion:
This is an increase of +100% in just eighteen months. This is unprecedented and now places the Fed just behind BlackRock as the second-largest asset manager in the world.
However, this is not part of the mission of a central bank like the Fed.
Fed will continue to buy at least $105B in assets in December 2021 with the possibility to adjust the pace if needed
The Fed has decided to start tapering. But beware, it will be done very gradually, not to say extremely slowly. Indeed, the Fed is going to reduce its asset purchases by $15 billion each month: $10 billion for Treasury bonds and $5 billion for mortgage-backed securities.