The $4.2 Trillion Dilemma

Minutes from the most recent Federal Reserve (Fed) meeting, released last Wednesday, sparked selling of stocks and bonds, as investors read that the Fed may reduce its $4.2 trillion balance sheet. Minutes also revealed that “some Fed officials viewed equity prices as quite high relative to standard valuation measures” and that there are “downside risks” if “financial markets were to experience a significant correction.” As we mentioned last week, we believe the stock market reaction to the Fed minutes was overdone, but nevertheless, investors should take the ending of Fed accommodation seriously.

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