“The Federal Reserve has been aggressive in its efforts to stabilize our financial system and to support economic activity. At some point, however, we will need to unwind our accommodative policies in order to avoid higher inflation in the future” Bernanke 12/06/2009.
I came back to work to find the quote above in the latest presentation of our Chief Investment Officer, Steen Jakobsen, and I immediately feel the irony. The policies implemented by the Federal Reserve since the global financial crisis until today seem not to have put a definitive solution to the financial market's problems. Actually, it created a new issue: the market likes the FED's money too much! So much that right now, it depends on it.
We can stay here talking all day about balance sheet normalization; however, if we look at the practice, we will see that a FED's balance sheet runoff was not feasible a year ago, it isn't now, and it might never be! Indeed, it was just a few months after the FED started to wind down its balance sheet in 2018 that the market got into liquidity troubles. Therefore, the central bank was forced to make a U-turn on its normalization plans to support the market again.
And then, coronavirus arrived.
Investors' fear combined with the FED's stimulus expansion pushed US Treasury yields to the lowest levels seen in history.
At this point, investors might ask, does it make sense to buy Treasuries at near-zero yields?
The answer's easy: it all depends on inflation.