The Fed and its Balance Sheet

This past Wednesday, the Federal Reserve stated that it believed the United States Economy was strong enough to start allowing their holdings in U.S. government bonds and mortgage securities to mature. Not many know that the Fed actually holds $4.5 trillion worth of these bonds and securities. How did they accumulate so much? Well, during the economic recession of 2008 the Federal Reserve deemed it necessary to increase their holdings from a mere $900 billion to $4.5 trillion. This allowed the economy to turn around and gradually pick up enough steam to hit record highs in the stock market and it is predicted that we will see unemployment drop to around 4% next year. Along with projected growth of 2.4% and Fed controlled interest rates staying around 1-1.25% this might be the perfect time for the Fed to reduce its holdings in the U.S. economy.  However, it is noted throughout several articles that the market will have somewhat of a reaction to these moves by the Federal Reserve, it is just unsure how and how strong the market will react. It is predicted that we will see some pullback as the Fed decreases its holdings, but if growth continues with increased deregulation the U.S. economy should have nothing to worry about. It should also help that Janet Yellen is going to start slowly with the reduction in holdings. Shes stated that we should expect the Fed to begin a reduction of $10 billion a month in October and then increasing the reductions to $50 billion until the holdings were at typical levels. All in all, with the economy showing strong recovery and growth the public shouldn't worry about anything. The Federal Reserve has made it extremely clear what their intentions are and they have followed through with them thus far. Therefore, the market should react accordingly if there are no surprises. The true surprise will come when Trump chooses to reappoint Yellen or not. Until then, the economy seems to be on a healthy path.

https://www.washingtonpost.com/news/wonk/wp/2017/09/20/in-sign-of-u-s-economys-strength-fed-to-start-reducing-4-5-trillion-balance-sheet/?utm_term=.97ad2373e228

http://www.marketwatch.com/story/feds-balance-sheet-unwind-will-be-moment-of-truth-for-financial-markets-2017-09-18