Stanley Fischer on the Balance Sheet: There will be no Tantrum on Wall Street

By: C.Jay Engel

Regarding the Fed’s balance sheet shrinkage narrative, one of the concerns is an unfavorable market response. The bond market (to the extent an actual market even exists) in 2013 panicked when the Fed began to taper it’s asset purchases. While many are concerned the markets could panic, Fed Vice Chair Stanley Fischer on Monday denied this as a true concern. After all, they’ve been talking about this for some time — even in the FOMC minutes — and the bond market has hardly shrugged.

Said Fischer:

My tentative conclusion from market responses to the limited amount of discussion of the process of reducing the size of our balance sheet that has taken place so far is that we appear less likely to face major market disturbances now than we did in the case of the taper tantrum.

However, he also stated it was something that needed to be monitored closely:

But, of course, as we continue to discuss and eventually implement policies to reduce our balance sheet, we will have to continue to monitor market developments and expectations carefully.

So, does this mean that the Fed actually submits to the will of traders on Wall Street after all? To this, Fischer is quick to save face:

During a question-and-answer session, Fischer dismissed concerns that the Fed was providing too much information and therefore fueling too much trading.

“I don’t think we’re engaged in a game where they are leading by us the nose,” he said.

Of course he has to say that. No one is supposed to admit that the Fed doesn’t do things on the mere science of dispassionate monetary policy. They cater to those whom they subsidize: both the Federal Government and Wall Street. And in the end, despite Fischer’s dismissal of a market tantrum, can we really expect Wall Street’s traders to smile and carry on as if they truly realize the Fed is no longer buying what they want to sell?

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