Unwinding quantitative easing

A delicate balance

Is the Fed’s shrinking balance-sheet causing market turbulence?

AS DULL AS “watching paint dry”. That was how Janet Yellen, the former head of the Federal Reserve, described plans for a gradual unwinding of its $4.5trn balance-sheet announced in September 2017. The Fed’s stock of assets had swelled during the previous decade as it engaged in “quantitative easing” (QE), seeking to ease the pernicious effects of the global financial crisis. Now that the economy had recovered, it planned to shrink its balance-sheet again.

The plan was to set a path and proceed on autopilot. This, it was hoped, would avoid the pace of unwinding being taken as a signal of the direction of interest rates. It would start slowly, just $10bn a month from October 2017, and smoothly pick up pace. By October 2018 it had quickened, as planned, to $50bn.

That coincided with the start of a bout of market turbulence. The S&P 500 index of leading shares fell by 14.0% in the final three months of 2018. The yield on ten-year Treasuries…