The FOMC announced today that they would further reduce QE3 by $10 billion, reducing the Fed’s monthly purchases to $65 billion, continuing to end the era of easy money. The stock market responded with an abrupt crash, ending the day down over 1%.
Despite the reduced buying, the Fed still sits on an over $4 trillion balance sheet. Although the Fed plans on reducing monthly purchases to zero by December, they still have a long way to go to finish unwinding their balance sheet. Four trillion dollars is a lot of money to suddenly release back in to the market. I expect markets to continue declining following any FOMC news until QE3 is completely cut out. When that day finally arrives (Fed begins unwinding QE3), I also expect the markets to crash in such a way that the crash rivals any other FOMC announcement. There is no easy way to flood the market with that much cash and not see a huge decline no matter how slowly they do it. Oh, and what happens when the next major recession comes? Does the Fed really have any room whatsoever to repeat Bernanke’s purchase program?
Anyway, all eyes rest on Janet Yellen as she takes over Bernanke’s helm on February 1st. I hope she can get us out of this mess.