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Federal Reserve Chairman Jerome Powell.
Graeme Jennings-Pool / Getty Images
Markets are taking note of the Federal Reserve’s apparent desire to reduce the size of its asset purchase program as early as this year. But this reduction, or “reduction” process, has already begun with some measures.
The Fed’s July minutes on Wednesday showed many members are in favor of slashing the cut this year. The Fed currently buys $ 120 billion in bonds each month, mostly long-standing treasures. This has kept the price of these bonds high and their yields low, helping to keep borrowing costs low and allowing households and businesses to easily access credit. Less money entering the bond market would have the opposite effect, increasing yields and limiting debt, investment and spending.
It looks like the stock market has taken note of the Fed’s fallacy. He
Dow Jones industrial average
it fell to 2.5% on Thursday from its all-time high, reaching August 16, before recovering part of the way.
But the volume reduction may have already begun. According to the Leuthold group, the Fed’s balance sheet growth reached 80% year-on-year when the central bank began its pandemic asset purchase program last year. Recently, this growth fell to 11%. This is mostly because the Fed has been buying almost the same amount of bonds a month as last year, so today’s year-on-year comparison isn’t as strong as last year.
Meanwhile, money supply growth – the current amount of cash in current accounts, savings accounts and money market funds – has also slowed. Last year it reached 27% and recently grew to only 12%. Simply put, the amount of money circulating in the economy has slowed.
“The fact is that the monetary downturn has been evident for months and has already significantly affected financial markets,” writes Jim Paulsen, investment strategist for the Leuthold Group chef.
The stock market has already taken note. The more cyclical sectors, whose profits are highly sensitive to changes in economic demand, have begun to perform lower than the market as a whole. He
S&P 500
The cyclical sectors (industrial, materials, financial and consumer discretionary among them) have risen more slowly than the broader index since March 2021, according to Leuthold data. It is an investment with respect to exceeding the performance of these sectors between August 2020 and March.
The next question is not so much how much the Fed will start to shrink, but how much it will reduce bond purchases.
Write to Jacob Sonenshine at [email protected]