In response to the financial crisis of 2008, the Federal Reserve (Fed) purchased over $4.2 trillion in bonds through a series of quantitative easing measures designed to push interest rates lower in an attempt to improve the environment for economic growth.
The Fed now believes that the economy has reached one of its key mandates – full employment – and is ready to embark on a project to reduce the size of its balance sheet.
What Happens Next?
In the initial stages of the reduction, the Fed will allow $10 billion in bonds to roll off the balance sheet each month; gradually increasing the rate to $50 billion per month.
The Fed will retain the option of throttling the unwinding by replacing some of the maturing bonds as economic conditions and interest rates dictate.
The general consensus is the Fed’s balance sheet will ultimately settle in the range of $2.5 to $3 trillion, far higher than the sub-$1 trillion level of pre-2008.
How Might it Affect You?
The predictable nature of the proposed balance sheet reduction should not be disruptive to the overall economy or the markets. Provided the Fed sticks to its plan of a predictive and gradual reduction, the reduction in demand for bonds should translate into slightly higher yields for the bonds.
Further, if yields climb, investors should be able to replace maturing bonds with higher-yielding bonds. At this point, we see no reason to adjust our projected return assumptions on bonds.
This perspective is the consensus of the INTRUST Bank, N.A. ("INTRUST") Wealth Investment Strategy team and are based on third party sources believed to be reliable. INTRUST has relied upon and assumed, without independent verification, the accuracy and completeness of this third party information.
INTRUST makes no warranties with regard to the information or results obtained by its use and disclaims any and all liability arising out of the use of, or reliance on the information.
The information presented has been prepared for informational purposes only. It should not be relied upon as a recommendation to buy or sell securities or to participate in any investment strategy. The information is not intended to, and should not, form a primary basis for any investment decisions. This information should not be construed as investment, legal, tax or accounting advice. Past performance is no guarantee of future results.
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