???Don???t fight the Fed!??? — Maxim of Wall Street
Since the financial crisis of 2008, the Fed has adopted a three-pronged easy-money policy:
- Increase its balance sheet by purchasing and holding $4 trillion worth of Treasury securities and mortgages;
- Sharply reduce interest rates to practically zero; and
- Expand the supply of money (M2) at 6-8% a year.
The Fed kept these easy-money policies in place until 2016. Now, we are seeing a gradual shift in policy:
- The Fed minutes, released April 5, revealed that for the first time the Fed will begin selling off the majority of its Treasury and mortgage securities. The stock market sold off on the news.
- Since late 2015, the Fed has begun to raise (deregulate) short-term interest rates, and has promised to raise rates two or three more times this year.
- The supply of money (M2) is still growing at 5-6% annual rate, slightly less than the past 6-8% rate
To read the rest of this article on the Fed’s transition from easy money to tight money, please click here.