The Fed Makes a Difference

ANG Traders
5 min readSep 25, 2017


The Fed Makes a Difference

Although Ms. Yellen reemphasized that the Federal Reserve is not on a preset course with its monetary policy, the Fed is non-the-less biased toward tightening. This, despite the fact that tax legislation (or any legislation, for that matter) has yet to be passed. It means that the Fed has confidence in the U.S. economy and in its ability to invite higher inflation.

Here is the summary of major conclusions from the Federal Reserve statement:

  • A unanimous vote left the target range unchanged at 1.00% to 1.25%.
  • The Fed said it will start its balance sheet normalization process in October as laid out in the June 2017 Addendum to the Committee’s Policy Normalization Principles and Plans
  • 12 of the 16 Fed members still project one more hike in 2017
  • 11 of the 16 Fed members project three rate hikes in 2018
  • The economic effects of the hurricanes are transitory and unlikely to materially alter the course of the national economy over the medium term
  • There was little change in the central tendency economic projections, although it is worth noting that the real GDP growth outlook for 2017 was revised slightly higher while the PCE inflation outlook was revised slightly lower
  • The median longer run fed funds rate — the so-called neutral rate — was reduced from 3.00% to 2.8% (this was an acknowledgement that the world has changed and that inflation may stay low for a very long time)

The following chart shows the CME Fedwatch target rate probabilities for December 13 as per our update earlier in the week.

And here is what happened after the Fed’s comments.

The market now understands that the bias in rates is up. Adding to this bias, is the balance sheet reduction which starts next month. As we pointed out in our update, since the Fed will not be reinvesting the entirety of the interest and principle from maturing bonds, demand for bonds will be lower, and that should put upward pressure on rates.

We think it is important to provide a historical as well as comparative view of the Federal Reserves’ balance sheet to have proper perspective. The chart below shows how the fed’s balance sheet grew to 23% of GDP as a result of the great depression, and then took fifty-years (1984) to return to pre-depression levels of about 5% of GDP. The chart only includes 2012, but today the balance sheet is around 22% and we can expect that the reduction is going to be slow once again, with a target of 13% of GDP by 2021 — assuming a recession doesn’t hit in the interim.

The chart below compares the balance sheet levels of the other major central banks. The ‘fat boy’ in the class is obviously the Bank of Japan with nearly 50% of GDP. The European CB has been reducing its balance sheet for some time, which may explain why its equities markets have not appreciated as much as the ones in the U.S.. {This section is for paid subscribers only}

Reducing the balance sheet is reverse QE which is likely to affect equities in the coming months, even if it is only a slowdown in the pace of new stock market highs.


This bull market is relentless! We think we are in a long-term, late-stage bull market that is likely to continue for another 12 to 18 months, but we also have been expecting a correction in this bull. The latter, has yet to materialize.


Based on sentiment, the level of fear continues too elevated for the creation of a major market top (chart below).

Fundamentally, GAAP earnings continue to grow (chart below).

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Technically, the long-term moving averages continue in bull market formation (chart below).


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The put-to-call ratio has spiked down which implies a 12/15 chance of a local top forming (chart below).


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Having failed to make a higher-high, gold finished the week at the lower boundary of support and the momentum indicators are negative (chart below).

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The TIPS bond etf (TIP) is a proxy for inflation expectations. Although it is elevated, recently it has dropped back to correlate with the move in gold (chart below).

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We wish our subscribers a profitable week ahead, and ask that email be monitored for Trade Alerts.


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ANG Traders

Forty years of private equity trading, and still learning.