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The Fed's Balance Sheet Could Be The Canary In The Coal Mine

Summary

When the Fed's balance sheet expansion ended in 2014, the S&P 500 stalled and the dollar surged.

Perhaps Yellen believes we're in tighter monetary conditions than we first thought, depending how she views the current status of the Fed's balance sheet.

Given the decline since 2015 of the dollar index, if the Fed doesn't hike this year, the dollar is at serious risk of decline.

With the Jackson Hole, Wyoming meeting this week, the market eagerly awaits any signals from Fed President, Janet Yellen as to the next steps in monetary policy.

Dovish remarks would likely send equities higher, and the dollar lower, while hawkish remarks would have the opposite effect.

However, if the Fed only hikes once this year, the medium and long term outlook for both future rate hikes and subsequently, market direction becomes rather murky.

Perhaps we should also be analyzing the Fed's balance sheet and the timetable for when the Fed decides to decrease it as they approach rate normalization. For some, and maybe even Janet Yellen herself, the Fed has already tightened substantially; albeit from historic levels of expansionary monetary policy.

The Fed's balance sheet may be the canary in the coal mine for longer term monetary policy.

What the Fed's balance sheet tells us:

The Fed tightened monetary policy in December of 2015 with a 25 basis point rate hike. However, it was the Fed's decision in late spring of 2014, to halt the expansion of the central bank's balance sheet that changed the financial market landscape.

"Since the beginning of the financial market turmoil in August 2007, the Federal reserve's balance sheet has grown in...


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