Fed Will Raise Rates And Expected to Announce Balance Sheet Reduction

The question is the balance sheet reduction roadmap.

We know the facts, the Fed is very likely to raise interest rates by 0.50%, that doesn’t mean that prices are reflected correctly. You might think that “since we know now, that all prices have already adjusted.” In theory, yes (finance jocks recall Fama’s Efficient Market Hypothesis from a “certain small school in the Midwest,” yo).

In practice, more complex than that.

  • Maybe current asset prices (including your house and the cost of cereal) already include the assumption of higher interest rates.

  • Maybe the Fed has seen the jarring equity market losses, and tones it down, comforting holders of risky assets (including real estate).

  • Maybe seeing the balance sheet reduction roadmap will surprise investors. If this is the case, interest rates can move by even more than they have (in either direction). Unsurprisingly, this is the singular reaction that I’ll be watching, closely.