As the Federal Reserve’s rate-setting committee meets this week, as markets around the world rock and roil, traders and investors have a swirl of questions. They wonder about China’s economy, they wonder why oil refuses to stop sliding. They wonder if the Fed will stick to its policy guns, or if they’ll back off the notion of four rate hikes this year. They are also openly questioning whether or not the Fed made a mistake in December.

Even after seven years of historically aggressive easing, was December too early to start raising rates? Judging by the action in the markets lately, the answer is yes.

Virtually every market in the free world is selling off, except for a few safe-haven outliers like the Japanese yen. China’s Shanghai fell more than 6% on Tuesday, and while U.S. stocks appear headed higher today, the S&P 500 is still down more than 8% so far in this very young year. Much of the current turmoil in the markets is being blamed on China or oil, but truth be told, both of those are just proximate causes. The ultimate cause is Fed policy.

Lindsey Group’s Peter Boockvar argues that it may already be too late to avoid a Fed-induced recession and a major market downturn. “The Fed went way too far,” he writes. “The only question in my mind is do you want to get it over with now or later?” Mr. Boockvar has been a consistent critic of the Fed, but others are similarly skeptical of whether the central bank realizes what it’s done.

“It all seems pretty obvious to those of us who have watched markets churn in recent weeks,” said FTN Financial’s Chris Low, “but after Bill Dudley’s oddly sunny assessment of the market reaction to the Fed in a speech last week, it’s not clear the Fed understands what’s going on.”

The FT did its own take on the question, too, saying that there’s increasing talk the Fed made a policy error.

The implied hope here is that the Fed will see the error in its ways, and turn ever so slightly dovish. Maybe it’ll throw a bone to “market conditions,” in its policy statement. Maybe it will hint at fewer than four rate hikes this year (that’s was the expectations of Fed officials just a month ago). The market isn’t going to be picky at this point. It’ll take anything. “We believe the committee will alter its view on the balance of risks by saying risks to the outlook for economic activity and labor markets are ‘nearly balanced’ instead of ‘balanced,’ as was the case in the December statement,” Barclays’ Michael Gapen wrote. That alone, he said, would hint at a “slightly dovish tilt.”

The markets may be underestimating the issue, though. The Fed spent seven years pumping liquidity into the capital markets. It jacked up its balance sheet to $4.5 trillion, including $1.7 trillion in mortgage-backed securities, from less a billion before the financial crisis. In doing so, it hoped to spark a “wealth effect” that would fan out to the general economy. It put its thumb on rates, made safe investments less attractive compared to riskier assets, and essentially forced investors out of the so-called yield curve.

Seven years is an unprecedented amount of time for such a policy, and now it is time to normalize it, to unwind it. “Normalizing” policy means running the balance sheet back down to something resembling the pre-crisis numbers. Unwinding those assets, whether selling them or letting them mature, means draining more than $3 trillion in liquidity from the capital markets. That’s not chump change.

People are shocked that the markets seemingly turned blood red all at once on Jan. 1, but the truth is the markets have been selling off for much longer. The S&P 500 is today about 4.5% below where it was when the Fed ended QE3 back in October 2014. The commodities market has blown up. The junk bond market has plunged. Emerging markets are a mess.

Nothing began on Jan. 1, 2016. It’s been happening for more than a year. Markets are dealing with the reality of tighter monetary policy from the Fed, no matter how fast or slow, no matter where exactly the dots fall, two hikes or four. Because, as Mr. Boockvar noted, it isn’t a question of whether the Fed will unwind the last seven years’ worth of stimulus, it’s a question of when.

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