FX.co ★ Fed cuts balance sheet by $900 billion

Despite the fact that markets have already gotten used to the Fed’s predictable monetary policy decisions, the regulator keeps investors on tenterhooks. It is not a secret that the Fed is likely to continue its tightening cycle. However, investors are closely watching the regulator's plans to shrink its balance sheet, posing a serious threat to stocks. As a rule, the stock market is a stressful place where calm makes many investors feel even more worried. The reduction in the Fed's balance sheet raised serious concerns. The US regulator cut its balance sheet by $900 billion this year, harming risk assets amid lower liquidity, according to Ned Davis Research (NDR) analysts. NDR fears that the monthly reduction in the balance sheet may severely hit tech stocks and other risky assets. Notably, since June 2022, the Fed has reduced its balance sheet to $7.6 trillion but was forced to inject $400 billion into the economy because of the banking crisis in March. "The Fed continues to redeem its securities holdings and shrink its balance sheet, reducing the liquidity it provides to banks and the economy. Risk assets love liquidity. Continued draining of liquidity presents a risk for equities and credit," Joe Kalish, Ned Davis Research analyst, said. Kalish noted that when Fed reserves rose by more than $62 billion in 4 weeks, stock returns posted yearly returns of 31% from March 2009. In contrast, when reserves fell by more than $38 billion in the last 4 weeks, the stock market faced troubles.