Tuesday, January 17, 2017

Fed Official Calls For Final Taper 'Sooner'

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*Lael Brainard who was supposed to work on Hillary Clinton's cabinet and was a perma-dove has turned hawk.

*Fiscal policy is itching her.

*She's one more Fed official to broach the idea of letting Fed balances "run-off.".

*After 10 years of Fed numbing buying letting balances run-off would allow markets to "trade" bringing volatility and risk back to markets.

Fed Governor Lael Brainard was a voice of calm after Fed President Eric Rosengren called for a hike that hit markets in September. Fed Gov. Brainard "saved markets" with her dovish tones. Today she exhibited her hawkish side. The Fed still matters especially when perennial doves turn hawk. She even called for the cessation of Fed purchases. That would cause volatility and risk to return back to markets.

Our All Time Favorite Chart
Our chart below indexed the build in Fed balances since the start of QE in 2008 to the S&P 500 ETF. The drop in these balances helped crash markets in 2008. The rise in these balances helped this eight year bull market.
Letting these balances run-off will be a material risk for markets.
Please take a moment of your day to review this next chart.
Data Sources: SOMA and Yahoo, Chart By Elazar Advisors, LLC
Above you have the yellow line Fed balances versus the SPY in green. When the "Fed" line went down in 2008 it helped crash markets (Yellen admits September 2016).
When the "Fed" line went up markets followed. When it went down markets followed.
Now its your turn to be the analyst. When that yellow line starts to come back down based on Fed Gov Brainard's comments, which way will that little green line go?
If you said "down" we agree.
The Democratically installed Fed is eyeing coming fiscal policy and is worried about inflation.

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