The recent market rally was largely fueled by dovish remarks from Federal Reserve chairman Jerome Powell.
The US central bank indicated that it would decide on the roadmap for suspending its program to reduce the bonds on its balance sheet in the upcoming meetings. The Fed is likely to announce the new plan in June.
Since former Fed chair Janet Yellen announced the program of shrinking the balance sheet in June two years ago, the amount of monthly reductions has increased gradually from US$10 billion to US$50 billion.
Given the strong rebound of US stocks, Powell is not in a hurry. He would probably wait until June.
If Powell makes the announcement in June and starts to wind down the balance sheet shrinking exercise gradually, it should be completed before the next presidential election in 2020.
A sharp fall in the stock market is unlikely as corporate earnings remain upbeat. Still, the Fed’s balance sheet reduction move may lead to some correction in the equity market.
The housing market could be a different story. Stocks are underpinned by earnings, but properties have no such support.
Thus, the property market may bear the brunt of less liquidity as housing prices basically mirror the country’s monetary supply.
This article appeared in the Hong Kong Economic Journal on Feb 18
Translation by Julie Zhu
[Chinese version 中文版]
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