Yesterday’s testimony by Jerome Powell, the recently appointed chairman of the Federal Reserve, significantly underlined the fact that we are now deeply immersed in a period of quantitative normalization.
In response to the economic meltdown and the recession that resulted from bank failures, an outcome of their lending practices, starting in 2008 the Federal Reserve initiated a systematic approach to revitalize the economy.
The Federal Reserve’s monetary policy became extremely accommodative by lowering the Fed funds rate to nearly zero and then making access to credit extremely plentiful.
This was accomplished through three quantitative easing programs: QE1 which began in November 2008, QE2 which was initiated in November 2010, and one final round, QE3 which started in September 2012.
During quantitative easing, the Federal Reserve’s balance sheet ballooned to $4.5 trillion in assets. Considering the fact that before quantitative easing the pre-crisis peak was at around $925 billion, this program added over $3 trillion.
The net result of these purchases was that the Federal Reserve’s portfolio of treasuries and mortgage-backed securities more than quadrupled. Officially, quantitative easing ended in October 2014.
In June of 2017, the Federal Reserve announced that it planned to slowly and methodically liquidate the majority of accumulated assets. This asset liquidation began at the end of 2017 and continues to this day.
The Fed’s balance sheet liquidation, along with the three small and measured rate hikes throughout last year, has clearly signaled a change in their monetary policy, the period of cheap and readily available credit was coming to an end.
Powell was Trump’s choice
Yesterday’s testimony by Chairman Powell revealed that his economic outlook had dramatically changed from December of last year. He sees the current economic environment, as well as future economic growth to be more robust than his outlook in December.
The key is that this updated economic outlook could undoubtedly accelerate the number of rate hikes in 2018, which is done in tandem with the Fed’s balance sheet liquidation, which continues to accelerate.
While there might be a new Sheriff in town with a newly appointed chairman of the Federal Reserve, it is quite clear that the institution is greater than any of the individual players.
At least for now, they will stay the course by maintaining the current quantitative normalization policies, they might however compress the timeline of implementation.
Wishing you as always, good trading,