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Despite the hype surrounding Wednesday's meeting of the Federal Open Market Committee (the monetary policy arm of the U.S. Federal Reserve), the announcement that followed doesn't change a thing.
That's right, nothing. Neither the FOMC statement itself nor Fed Chair Janet Yellen told us anything that the Fed and its proxies hadn't told us before.
But nevertheless, this is still groundbreaking stuff. It is the most important announcement since the Fed instituted outright QE in March 2009.
And as I have told you in past posts, it will have major implications for the markets and for your money.
There is a lot here that is essential for you to understand to protect your money and take advantage of this new policy.
And – fair warning – it's not bullish.
Here's what happened and what you need to know…
They've Been Telegraphing This Move for Months
Here's the important part of the Fed's statement from Wednesday: "In October, the Committee will initiate the balance sheet normalization program described in the June 2017 Addendum to the Committee's Policy Normalization Principles and Plans."
This is not new.
Three months ago, the June 14 FOMC meeting statement was accompanied by an addendum that stated exactly what the Fed would do, which the FOMC statement made official Wednesday.
This is a real monetary tightening. It's not a tightening by higher interest rates, but with the actual reduction of the amount of money in the pool of cash (aka liquidity) available to the markets.
Of course, I've been telling you about this for months.
I told you that the process of Fed balance sheet "normalization" would begin in the first month after the announcement – October – and that this would put the short-term LAMMP on a red signal with the long-term LAMPP following suit in a few weeks.
It might take as long as two months, but that signal is coming.
And as I told you earlier this week, the Treasury could bring it on even faster as it sells more and more debt now that the debt ceiling has been lifted. When the Treasury sells debt, it is drawing those funds from the same cash pool (the banking system) that the Fed will be shrinking. There will be less money in the system (and more supply of securities) as the Treasury builds up another $500 billion rainy day fund in its account at the Fed. If the Treasury follows through on this, it will have the effect of an even bigger tightening than the Fed's.
Money fuels demand, so with less fuel available to the dealers, there will be less demand for securities. Falling demand versus increasing supply is a recipe for lower prices. And since stocks and bonds are simply different forms of securities, shrinking the money pool while increasing the supply of bonds will drive both stock and bond prices lower.
So in Wednesday's FOMC statement, the Fed made the policy official. In June, the Fed told us this exact policy was coming. Not even the two massive hurricanes that devastated Texas and Florida could deter the postman from his appointed rounds.
I can assure you that the primary dealers and the big hedge funds have gotten the message and are heeding it. It behooves us to heed that message too.
Here's the Fed's Plan – and What It Means for Your Money
About the Author
Financial Analyst, 50-year charting expert, finance + real estate pro, and market analyst; published and edited the Wall Street Examiner since 2000.