Chart of the Month: The Fed’s Pace of Tightening Ramped up Considerably in 2018
The Fed’s path to normalizing interest rates after a prolonged period of near-zero rates started out slow, but the pace of monetary tightening has ramped up considerably over the last year. Liquidity in the financial markets rapidly started to disappear in the 4th quarter, as the Fed delivered its 9th rate hike of the tightening cycle and ramped up its quantitative tightening program to a $50 billion per month pace.
While Fed rate hikes generally receive the most media attention, behind the scenes, the assets on the Fed’s balance sheet have shrunk by nearly $500 billion since late-2017. The Fed’s balance sheet unwind has removed a key source of support for the financial markets and has heightened investor anxiety about the future performance of risk assets.
Tighter financial conditions unsettled global financial markets in 2018, and volatility picked up notably in the final quarter of the year. Not surprisingly, risk assets, such as equities and high-yield debt, delivered their worst returns in 2018 since the financial crisis of 2008. Cash was one of the few asset classes to generate a positive total return in 2018. Will rate increases and quantitative tightening remain on auto-pilot or will the Fed have to pivot in 2019?
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