The big news from the Federal Reserve wasn’t the quarter point rate hike (which was expected). The big news was Fed chair Janet Yellen’s announcement of “balance sheet normalization.”
In plain English, the Fed claims it will begin selling off assets from its balance sheet, which remains bloated from previous Quantitative Easing programs. If “normalization” does actually proceed at full speed, it would entail $ 50 billion in financial assets per month being dumped into the market.
Not even Fed officials know how markets will react to the fire sale. But it will likely have the effect of a set of stealth rate hikes. That’s assuming Yellen follows through on her “normalization” threat.
Despite Yellen’s hawkish tone, Fed fund futures markets are pricing in only a 45% chance of another rate hike before the end of the year. The central bank may not get very far in unwinding its balance sheet either, especially given extant economic fragilities.
Retail sales have slumped for four straight months even as consumers ramp up their debt loads to dangerous levels. “Household borrowings have surged to a record $ 12.73 trillion, and the percentage of debt that is overdue has risen for two consecutive quarters,” reports Bloomberg.
With commodity prices and Consumer Price Index readings on the decline in recent months, the Fed now risks pushing the economy into recession.
Of course, things are still going swimmingly on Wall Street. The Dow Jones Industrials closed last Friday at another slight new record high at 21,384.
However, the Nasdaq 100 closed down to a four-week low. Top Nasdaq names such as Apple, Google, and Baidu had been the market leaders. The fact that they are now lagging spells potential trouble for the broader stock market.
Volatility in the stock market has been muted for so long that when fear finally breaks out, the magnitude of the price drops that follow could catch investors by surprise. The upshot of a sell-off in stocks is that it could rekindle a rise in safe-haven demand for the money metals.