The time has come. The minutes of the Federal Reserve's March meeting revealed that most central bank officials felt it was appropriate to tackle the Fed's $4.5 trillion balance sheet this year. This process may spark plenty of volatility in stocks.
"Provided that the economy continued to perform about as expected, most participants anticipated that gradual increases in the federal funds rate would continue and judged that a change to the Committee's reinvestment policy would likely be appropriate later this year," the minutes said, released Wednesday.
Bob Miller, portfolio manager of the BlackRock Total Return Fund (MAHQX) , said he expects any changes to the Fed's balance sheet to be slow and gradual. To maintain the size of its balance sheet, the Fed has been taking proceeds from matured bonds and reinvesting them in new ones. In essence, quantitative easing, which officially ended in 2014, is alive and well.
When the Fed refers to changes in its reinvestment policy, that suggests the central bank may start to taper, or eventually, end those reinvestments. This process may have the same cooling effect on the economy as raising interest rates, which the Fed did in March 2017 and December 2016.
Once the Fed starts to tackle its balance sheet, Miller expects the Fed to pause its interest rate hikes. He expects two more rate hikes in 2017.
By: Scott Gamm (The Street).
Photo: Yahoo.
Review: Emerging Market Formulations & Research Unit, Flagship Records.