Farewell quantitative tightening, we hardly knew thee. It seems that the financial experiment by the Federal Reserve of raising rates and reducing its balance sheet is over. With negative interest rates being so ubiquitous globally (see Figure 1), perhaps it was just too radical an idea. The Federal Reserve's balance sheet increased during the third quarter and ended at over $3.8 trillion, well above the projected ending point of $3.5 trillion (see Figure 2). It's back to joining the European Central Bank, the Bank of Japan and their liquidity pumping monetary policies, often dubbed "QE Infinity." For capital market purists, such a move might be characterized as a step closer to a centrally planned economy versus a free-flowing capitalist one.
Given the repeated stance by the Federal Reserve that it is "data dependent," proactive rate cutting and an aggressive balance sheet pivot is a bit incongruous. Such actions give the impression that perhaps the Federal Reserve is overly focused on the senescence of the equity bull market, or worse, that their brief dalliance with trying to normalize financial conditions revealed fragility they were not expecting. Has all the easy money since the Great Financial Crisis created a snowflake global economy? Economic data in the U.S. seems to indicate the domestic economy is still moving along nicely. Perhaps the mountain of debt accumulated by consumers, corporations and the federal government is looming a bit larger for the Federal Reserve as it hashes out its next policy moves.
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