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Coming Undone: A Story of the Fed Balance Sheet

What’s Going On?

You may have seen the saga beginning to unfold in financial headlines recently. Financial crisis, the Fed, balance sheets, QE, treasuries: the action hasn’t stopped. And when I say work, I mean dense, boring charts and analysis trying to predict the outcome of monetary policy ?
The Federal Reserve is cruising into the uncharted water this week by beginning to unwind its balance sheet. Let us explore what the effects could be for your Stockpile account and the market as a whole.

What Does This Mean?

After the 2008 Financial Crisis, the Fed scooped up a bunch of bonds and mortgage-backed securities to pull the U.S. economy from the brink of disaster. This was known as “quantitative easing” and was designed to drive down interest rates, raise investors’ appetite for riskier assets and boost the economy.

But now The Fed is going to “Put the thing down, flip it and reverse it,” to quote Missy Elliott…

… and start reeling back in all of that support they gave our economy when the United States economy needed it. Since we’re quantitative easing newbies (this was the first time it was needed), many Wall Street analysts can only guess as to the effects that this will have on markets.
With the stock market hitting all-time highs and the recent economic growth, the Fed is dropping the training wheels and letting us ride on our own. But they now have the cumbersome task of slowly letting those bonds and mortgage-backed securities mature and do it in such a way that it doesn’t throw the market into chaos. They plan to do it slowly so that they do not cause too much disruption.

Why Should I Care for The Financial Crisis?

After the Financial Crisis, the Fed expanded its balance sheet from about $900 billion to $4.5 trillion. Interest rates have been meager for years which led investors to leave the safety of the bond markets looking for higher returns in the stock market.
Many people think that this slow unwinding might mean investors will exit the stock market and get back into government securities since this tightening will mean the rising of interest rates. The safest bet is to always wait and see, stay invested for the long haul.

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