The Fed’s fuzzy policies rattle reeling sharemarkets

US investors expected the Federal Reserve Board to confirm their worst fears. It didn’t, but they sold anyway.

The Fed started tapering those purchases -- which were running at $US120 billion a month from the start of the pandemic and have swollen the Fed’s balance sheet from just under $US4 trillion to almost $US9 trillion -- last November.

What seems to have spooked investors was Powell’s unwillingness to rule out a rate rise at every Fed meeting this year, saying there was “quite a bit of room” to raise rates without threatening the labour market. It could have been worse. What the Fed does with its bloated balance sheet is just as important for investors and the US and global economy as the timing and number of its rate increases.

After that, the approach of shrinking the balance sheet by not reinvesting all the proceeds from maturing securities means that in five years’ time the Fed could still be holding $US2 trillion or more assets than it did pre-pandemic. The new policy has failed its first test given that, with US inflation is now running at 40-year highs, the Fed was forced into a complete about-face late last year; from an expansionary or “dovish” stance to a “hawkish” one, albeit that implementation of the shift in the rate structure and the start of the “quantitative tightening” is being pursued at a leisurely pace and without any defined structures.

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