By Kevin Flanagan , WisdomTree Investments
In the post-Federal Reserve (Fed)-meeting world of the money and bond markets, there seems to be a disconnect between what market participants are thinking and the Fed policy decisions actually being made. It is a case of the market not buying what the Fed is selling.
In other words, the term “policy mistake” has begun to enter the discussion, as the U.S. Treasury (UST) arena appears to be operating under the assumption that the Fed should perhaps ease up on its tightening campaign because
(a) inflation has been slowing in recent months, and
(b) economic growth has been lackluster. This line of reasoning concludes that the policy makers will go too far with their rate hike and balance sheet normalization plans, to the detriment of the economic setting.
Based on the Fed’s actions at the June FOMC meeting, the policy makers do not seem to be deterred in their “full steam ahead” outlook, as they envision yet another rate hike this year and expect “to begin implementing a balance sheet normalization program this year” as well. (On Wednesday, July 27, the Fed kept interest rates unchanged — Editor.)
So, let’s assume economic and financial conditions do live up to the Fed’s expectations, what then will their plan look like for phasing out their reinvestment program.