The FED to Shrink Its Balance Sheet, Plunging Economy into Recession
The FED’s bond purchases from their qualitative easing program
has provided liquidity to the markets.
They’re pulling that back now – it could crash the stock market and plunge the economy into recession if done too quickly
Members of the Federal Reserve are arguing how swiftly the central bank should shrink its bond portfolio without triggering a recession.
The Federal Reserve’s asset balance is about $9 trillion as of the second quarter of 2022. The majority of these assets are government debt and mortgages that have been securitized. The majority were bought to reassure investors amid the subprime mortgage crisis of 2008 and the pandemic of 2020.
“What’s occurred is that the balance sheet has evolved into a policy instrument.” Former Vice Chairman of the Federal Reserve Board of Governors Roger Ferguson told CNBC. “The Federal Reserve is using its balance sheet to achieve unprecedented results.”
The Federal Reserve of the United States has traditionally utilized its role as a lender of last resort to inject liquidity into markets in times of crisis. When the central bank purchases bonds, it may encourage investors to pursue riskier investments. Despite difficult economic conditions for small firms and regular employees, the Fed’s actions have benefited US stocks.
According to Kathryn Judge, a Columbia Law professor, the Fed’s stimulus is like lubricant for the financial system’s wheels. “There are fears that if they apply too much grease too frequently, the whole machinery would become risk-seeking and vulnerable in other ways,” she told CNBC in an interview.
Analysts fear the Fed’s decision to raise interest rates in 2022 before rapidly shrinking its balance sheet might trigger a recession if riskier assets are revalued.
But the FED doesn’t have a lot of options that won’t rock the stock market boat when it comes to fighting runaway inflation.
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Mar 10
20220
commentsBy The Minister of Capitalism
In News
Tags economy inflation Market Commentary stock marekt
Mortgage Rates Are Rising, Adding to Inflationary Costs
Mortgage rates are rising again, fueled by concerns about growing inflation
According to Freddie Mac, the 30-year fixed-rate mortgage averaged 3.85 percent in the week ending March 10, up from 3.76 percent the week before.
Fears of inflation and geopolitical uncertainty are both having an effect, according to Freddie Mac’s senior economist, Sam Khater.
“We expect rates to continue to climb in the long run as inflation broadens and shortages affect more sectors of the economy,” Khater added. “However, rate volatility is being driven by concern regarding the crisis in Ukraine, and this is likely to persist in the immediate term.”
According to George Ratiu, Realtor.com’s manager of economic analysis, the 30-year rate returned this week following a surge in the 10-year Treasury, which exceeded 1.95 percent.
“Investors are concerned about rising inflation as a result of a possible restriction on Russian oil imports, since the price of US crude has risen to almost $130 per barrel, the highest level in 13 years,” he added.
Inflation rose at its quickest rate in 40 years in February, raising fears of a consumer spending slowdown in the months ahead, according to Ratiu.
Last month, prices continued to rise, pushing a key inflation indicator to levels not seen since January 1982.
All eyes are on the Federal Reserve, which will meet next week and is likely to raise the federal funds rate in an effort to keep inflation under control.
“The key concern on many analysts’ minds is whether a 25-basis-point raise would be sufficient given the considerable labor shortage and inflation at levels not seen since the 1980s,” Ratiu said.
As the spring sales season heats up, the real estate market continues to see rising prices and record low inventories.
According to Realtor.com, a buyer of a median-priced property today faces a mortgage payment that is more than $290 per month more than a year ago.
“With a shortage of homes for sale, both first-time buyers and homeowners searching for a trade-up property are trapped by rising prices and borrowing rates,” Ratiu explained. “The actual problem for Americans is that rising inflation is eroding pay and salary growth, on top of rising housing and living expenditures.”
With rising inflation increasing costs and decreasing the buying power of the consumer paycheck, it’s only a matter of time before something breaks.
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