Five Rate Hikes This Year? by Brian Maher
Janet Yellen’s announced plans to raise rates three times this year…
But could she actually deliver five?
A scandalous question no doubt. Three hikes are possible, and barely. Four’s over the top, and five is simply out of court. Five would kill the economy.
So how do we get five?
Let’s untangle the yarn…
The Fed’s balance sheet was about $800 billion before the great crisis of 2008. Modest. Or at least… manageable.
Then the Honorable Mr. Ben Bernanke responded to the crisis with the grandest, most swashbuckling monetary experiment in world history.
The Fed purchased trillions of dollars of bonds under QE numbers 1, 2 and 3 and Operation Twist and heaven knows what.
Its balance sheet ballooned to $4.2 trillion — some four times larger than pre-crisis levels — where it stands today
It was an emergency measure, they said. They’d worry about unwinding the balance sheet later, when things returned to normal.
It’s now 2017. Things have returned, in their own nervous and winding way, to conditions approaching normal. Official unemployment hums at 4.8%. Inflation, years dormant, musters steam. Green shoots of growth appear here, there and points between.
Many now claim it’s time to start unwinding the balance sheet. To take away the crutch. But no one’s ever tried to unwind a balance sheet this size.
So here’s the $4.2 trillion question:
Can the Fed unwind its balance sheet — take away the crutch — without panicking the markets?
Not according to Bloomberg’s Vincent Cignarella: “With so much uncertainty in the market about how it will be reduced, a few mistimed words could roil markets faster than you can mouth ‘taper tantrum.’”
“Taper tantrum” being a reference to the open revolt markets mounted in 2013 at the mere suggestion that Ben Bernanke might wind down the bond purchases — take away the crutch.
Mark MacQueen, co-founder and portfolio manager at Sage Advisory Services agrees: “The unwind will not be pretty.”
We said Janet Yellen could end up hiking rates five times this year — even though she plans for three. Where do we get the other two?