The Federal Reserve’s balance sheet reduction continues to threaten the stock market, despite nearing the end of its rate hikes, Business Insider reports.
Ned Davis Research emphasized in a note on Thursday that the Fed’s quantitative tightening could impact stock prices and other risk assets.
Since June 2022, the Fed has decreased its balance sheet by $900 billion to $7.6 trillion. This reduction was despite the Fed’s $400 billion liquidity injection to manage the regional banking crisis in March.
“Liquidity is the lifeblood of the financial markets… Risk assets love liquidity. Continued draining of liquidity presents a risk for equities and credit,” stated Joseph Kalish, Ned Davis Research’s chief global macro strategist.
The Fed’s monthly balance sheet reduction averages $80 billion. Stocks usually thrive when the opposite occurs, as per NDR’s findings.
Stocks may face challenges even if the Fed halts its interest rate hikes, given the central bank’s unwavering commitment to reducing its balance sheet.
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