Pro Perspectives 1/29/20

January 29, 2020

The Fed held steady today on rates, as expected.  What about the balance sheet?

In their December communication, the Fed said it would continue expanding the balance sheet,  at least through January (this month).  Today, they extended that timeline through "at least the second quarter of 2020."   

Since September, the Fed has gone from shrinking the balance sheet, to expanding it at the fastest pace since the early days of the financial crisis.  Stocks have gone up. 

But more importantly for stocks, than just the Fed's actions, has been the broader reversal of the global liquidity (from contracting, to once again expanding). 

Remember, the gut punch for stocks was December of 2018, when the ECB ended its QE program, and the Fed continued to telegraph a smaller balance sheet.  That signaled the reduction of global liquidity.  And stocks didn't like it.   Prior to that, the ECB and BOJ has been offsetting the Fed's balance sheet reduction.  When the ECB thought that they too could step away, that's when global markets became unsettled.  

Bottom line, global central banks (led by the Fed) are back in the mode aggressively promoting growth, and playing defense against any potential shocks.  And for the Fed’s part, they’ve made it clear that they are staying in this position until they see significant and sustained inflation (above their 2% target).  This, even though the very risk that put them in this position has since cleared (i.e. the dark clouds of an indefinite trade war).


With that, the bubbling up of the pandemic threat, going into this month’s Fed meeting, probably made Powell’s job a little easier to defend their stance today.