The Fed’s great unwinding


The Federal Reserve is ready to dial back its gargantuan balance sheet.

In the wake of the global financial crisis, central banks in the US, Europe and Japan launched radical reflation campaigns.

 

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The Fed slashed interest rates and launched aggressive bond-buying operations known as quantitative easing.

 

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Great Unwinding

The Fed is now ready to shrink its $4.2 trillion-plus holdings in bonds and mortgage securities, according to the Wall Street Journal.

So far, the financial markets haven’t reacted much. But the worry is that short-term interests might climb higher and slow economic growth.

The Fed has already started raising rates from near-zero levels and borrowing costs for homeowners, businesses and consumers is starting to rise.

 

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Bloomberg: Fed Funds Rate

Takeaway

I think the Fed will need to follow the Goldilocks principle as it shrinks its balance sheet.

Move too fast and you might sink the economic recovery.

Move too slow, and easy-money conditions in a growing economies may spark inflation.

Greg McBride, chief financial analyst at Bankrate.com, told CNBC that the Fed may take 15 or 20 years to cutting its balance sheet down to size.

In my opinion, much is riding on the Fed getting this right.

 

Photo Credit: DonkeyHotey via Flickr Creative Commons

 

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Xavier Brenner
Xavier Brenner
Xavier Brenner has covered global market, business and economic trends for Interactive Brokers Asset Management since 2013. An experienced financial journalist, Brenner offers analysis and insights on the stories that matter to the discerning investor.