It was supposed to make gold rally. We mean, of course, the quantitative tightening. But one year after it started, the yellow metal still does not shine.
Anniversaries, anniversaries everywhere. The analysts focus on the 10-year anniversary of the Lehman Bankruptcy which lead to the Global Financial Crisis and the Great Recession (we have covered this issue in the previous section of this edition of the Market Overview), neglecting another important anniversary. In October 2017, the Fed started unwinding its massive balance sheet. Although the process of quantitative tightening began slowly and with some problems (the balance sheet has even increased initially), the US central bank managed to reduce the amount of its assets, as the chart below shows.
Chart 1: Fed’s balance sheet (in trillions of $) from October 2007 to September 2018.
As one can see, the Fed shrank its balance sheet from about $4.46 to about $4.21 trillion. It means a reduction of $250 billion over a year. Hence, the Fed conducts its plan of unwinding generally in line with the original plan. As a reminder, the US central bank announced that it would remove $300 billion over twelve months.
The Fed’s normalization of its monetary policy has been running smoothly so far. Theoretically, there is a risk that it could change this month, as the caps on securities reductions reached their maximum amounts. It means that since October 2019, the Fed will remove $50 billion per month until it judges that the size of its assets is appropriate. So over the next twelve months, the US central bank will remove $600 billion, twice as much as in the first year of operation.
However, the whole process was well telegraphed, and it will still remain gradual. Moreover, the Fed is reducing its balance sheet without actually selling any securities, just allowing them to mature, so we do not expect any significant perturbations on the way.
