Federal Reserve Expansion of the Balance Sheet & Stock Market Impact with Danielle Shay


Last Wednesday, Fed Chairman Powell noted that the Federal Reserve is going to work to expand their balance sheet, in an effort to quell the repo market and keep interest rates under their control. While the stock market initially reacted positively on this news, it was short lived, and it sold off into the session. Also weighing on the stock market is more trade war news and a potential rate cut later this month. What are we looking for the next time the Fed speaks? How do we think the market will react? Click on the video above to learn more. 

Powell spoke – and the market is reacting.

So far, the market is reacting positively to Powell’s comments. An expansion of the balance sheet as a response to funding issues in the repo market makes sense, and to me, it is a signal the Fed is either in control or going to get in control of the repo market. Losing control of interest rates is the more concerning possibility, and I find it interesting that even though the Fed has been having so many issues with this, it hasn’t sent more shock through the stock market. The stock market likes a Fed in control along with a lack of political discord and if we can at least get one of the two, the stock market will be in a better position to trade higher.

What about a deal with China?

The market is waiting for the latest with the US and China, and investors want a deal – if at the very minimum, a short term deal. That would assist against the uncertainty we are currently seeing in the market. However the likelihood that China wants one – particularly with the President in an impeachment process and an election next year, doesn’t seem high to me. The Chinese haven’t been keen to make a quick deal, despite ongoing data that displays the weakness of their economy.

How long can we go without one?

Well, the longer we go without one the more likely that it becomes a main issue in the 2020 election and it would give democrats a pretty easy leg to stand on (Trump trade war is ruining the economy, vote for us and we will end it!). Right now it has primarily impacted the industrial sector and stocks impacted by steel tariffs. This includes John Deer, Boeing, and Caterpillar.

My primary concern here is that the new tariffs coming into play are going to impact retail goods and consumers, which will send much more shocking effects through the stock market and the American consumer. This will bleed into consumer sentiment and eventually stock prices through earnings. It won’t happen immediately though, I would say a couple quarters after the tariffs go into effect, so I’m looking at later next year in 2020. That is when I would expect to see an impact in consumer stocks.

So, the trade war could go on until then, and if Trump gets re-elected and doesn’t get impeached then we will definitely need a resolution and China will more than likely be interested in coming to the table since the damage to their economy will be even worse by then. It’s hurting the US, yes, but even worse for China. The best situation for me would be a trade deal that takes away tariffs on consumer goods and retail products, or at the very least, a postponement of these tariffs.

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