Monday, January 2, 2017

Fed Balances Dropped But Still Causing Bubble: Risk To Markets

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*We've been tracking Federal Reserve balances. These are the assets built up from quantitative easing.

*Moves in these assets help markets move up and down. The latest move was down.

*One Fed official called for letting these balances run-off which would be a risk to markets.

*Not letting them run off creates an asset bubble where markets can go up while the economy slows.

The Fed has been, as it self-proclaims, "accommodative" by not letting their balance sheet run off as it matures. Not letting it run off means the Fed is in the market buying just about every month so its asset levels stay high. This week their balances dropped which can be a risk to markets (NYSEARCA:SPY). Ultimately the Fed needs to let these assets shrink which will be a risk for markets when it occurs.
Latest Fed Balance Sheet Numbers Drop
2016 will end the year with Federal Reserves being about flattish (down slightly). This is the first year since 2012 where the S&P 500 diverged from the annual Fed balance changes.
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