Something has shaken the confidence of investors. Actually, it’s not much of a mystery, but President Donald Trump’s trade tax isn’t the only cause of concern for investors.
So is the Federal Reserve’s steady inaction.
For nine months, the central bank has slowly been shrinking its massive balance sheet by not using the cash it collects in interest payments to buy more bonds. Its plan has been to gradually increase the amount it doesn’t reinvest, thereby reducing its balance sheet.
In the week ahead, the Fed’s plan is due to ramp up further by reducing its holdings by $40 billion a month, up from its previous pace of $30 billion per month, and double the pace from the first quarter.
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If the Fed sticks to its schedule, it will shed more than $420 billion of the government bonds and mortgage-backed bonds it bought after the Great Recession. Even still, it’s portfolio will be close to $4 trillion — massive by pre-recession standards.
While the Fed’s inaction toward reinvestment is a welcome sign of continued economic confidence by the agency, investors have been richly rewarded during its extraordinary measures. As it pulls the punch bowl away, no matter how slow and methodical, investors are on edge.
And it doesn’t help when trading barbs over global trade turns to taxing trade with China in the week ahead.
On Friday, the U.S. will begin collecting a 25 percent tariff on billions of dollars worth of Chinese imports. When the deadline was announced just three weeks ago, China immediately responded with its own set of taxes on billions of dollars of American made goods.
Tearing down international trade barriers has been a boon for global-minded investors. It has driven down costs, opened new markets and fueled profits. Erecting barriers, no matter the political intention, threatens that growth.
As the tough trade talk between Trump and Beijing turns to actual tariffs this week, investors confidence is shaken.
Investor courage is a delicate, but necessary component for a healthy market. It will continue to be tested by the Fed’s deliberate action and the administration’s idiosyncratic trade policies.
Tom Hudson hosts “The Sunshine Economy” on WLRN-FM; @HudsonsView.