August 12, 2022

THE FED JUST FAILED | Why The Market Is Falling

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How The Federal Reserve Impacts The Stock / Cryptocurrency Market:

First, is known as a “Balance Sheet Runoff.”
This just means that, when those Bond IOU’s mature and come due…the Federal Reserve can choose to take that money OUT of circulation, instead of re-investing it. It would be no different than them loaning you $10,000 for one year…and, then when you pay it back, they take that money – and, instead of loaning it to someone else…it’s just: *POOF*…Gone. In terms of how much this amounts to, a recent report showed that $4.5 Trillion In Purchases would “unwind” at a rate of more than $50 billion per month.

Second, is known as a “Tapering.”
See, up until recently, the Federal Reserve was BUYING $120 Billion Dollars Per Month of Treasury Bonds and Mortgage Backed Securities to “inject” more money into the economy. But now, they’re moving forward with a plan to slowly reduce that amount by $30 billion per month until – by the end of March – they’re no longer buying anything else.

And third, raising interest rates.
At the end of the day, the goal is that interest rates will begin to increase, now that the unemployment rate dropped to 3.9%. The biggest fear is that the Federal Reserve will begin REMOVING liquidity from the markets, taking excess money OUT of supply, and draining all of that sweet, sweet leverage that kept prices higher than usual.

The sudden sell-off was attributed to their comments within the FED Minutes:
It’s quoted that: “Many participants judged that the appropriate pace of balance sheet runoff would likely be faster than it was during the previous normalization episode.” …. which, is another way of saying: Our economy is doing better than expected, we have more money in circulation than expected, and inflation is higher than expected…THEREFORE, we can have faster rate hikes – and, a faster RUNOFF than expected…which, is worrying investors.

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Graham Stephan receives cash compensation from Wealthfront Advisers LLC (“Wealthfront Advisers”) for sponsored advertising materials. Graham Stephan is not a client and this is a paid endorsement. Graham Stephan and Wealthfront Advisers are not associated with one another and have no formal relationship outside of this arrangement. Nothing in this communication should be construed as a solicitation, offer, or recommendation, to buy or sell any security. Any links provided by Graham Stephan are not intended to imply that Wealthfront Advisers or its affiliates endorses, sponsors, promotes and/or is affiliated with the owners of or participants in those sites, or endorses any information contained on those sites, unless expressly stated otherwise. Investment management and advisory services are provided by Wealthfront, an SEC registered investment adviser. All investing involves risk, including the possible loss of money you invest, and past performance does not guarantee future performance.

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