Ben Emons, Columnist

Fed Balance Sheet Policy May Amount to More Easing

The structure of the bond market these days is such that there's a good chance financial conditions will continue to loosen.

August 2, 2017 at 3:00 PM UTC

By Ben Emons

Ben Emons is the founder of FedWatch Advisors, a firm specialized in analysis and investing around the Fed. Previously he was associated with NewEdge Wealth as head of fixed income and Medley Global Advisors as Managing Director of Global Macro Strategy. The opinions expressed are his own.

Easy money.
Photographer: Joe Raedle/Getty Images

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The Federal Reserve has raised interest rates four times since December 2015 and financial conditions have eased. That is the opposite of what Fed policy makers had hoped would happen as they tightened monetary policy. Now, central bankers are talking about taking the next step and shrinking the Fed's $4.5 trillion balance sheet by not reinvesting the proceeds of maturing bonds into new securities.

Surely that will cause long-term yields to rise and financial conditions to finally tighten, right? Maybe not. The structure of the bond market these days is such that there's a good chance conditions will continue to loosen, further underpinning demand for riskier assets ranging from equities to high-yield debt to emerging-market currencies.