Let the farce begin.
The Fed meets today to discuss whether or not to begin shrinking its balance sheet. The financial media informs us that this is the single most important Fed meeting in years and that its coming announcement is a game-changer.
Give me a break.
The day has finally arrived: today the Fed will officially announce the start of its balance sheet shrinkage (full preview here) while keeping rates unchanged, perhaps hiking again in December (market odds at 56%), while revising its economic projections and "dots", most likely in a lower direction.
From Bloomberg macro commentator Marc Cudmore
Today’s Fed meeting is critical for all financial assets. A large part of the framework for how to trade the year ahead will be clarified between Wednesday’s statement, the dot plot and subsequent FOMC member speeches in coming days.
Fed meetings are often overhyped, particularly by financial commentators. Don’t dismiss the hype this time. And because the Fed’s decision is so crucial for the path of FX and rates, every other asset hinges on the outcome by extension.
Last December we joked that the Norwegian sovereign wealth fund had responded to sinking returns and withdrawals required to fund budget deficits by allocating another $130 billion in assets to what appeared to be an already massively overpriced equity bubble in return for an extra 40bps of "expected average annual real returns." (see: Norway Buying $130 Billion In Global Equities As Sovereign Wealth Fund Continues To Bleed Cash). The extra equity purchases pushed the fund's total equity allocation to a staggering 70% of their $860 billion in assets under management.
The Federal Reserve has manipulated bond prices for the last
10 years. Yields in the US and abroad
are lower now than during the Great Depression – a period in time that could
justify such low yields. For those with
short memories, bond markets are more expensive than before and right after the
financial crisis of 2008. Longer dated
yields are at least 300 basis points richer than typical when inflation is
running around 2% as it is today. Yes,