The Fed will kick the markets next year. And it's going to be a ride

Unlike in the past, this comes at a time when markets are at their peak.

Tightening has tamed inflation by the Fed selling the Treasury bonds it bought, driving down their price. Lower bond prices automatically mean higher yields, making it more expensive for companies and households to invest and borrow. This is the opposite of the quantitative easing that central banks have turned on in crises when they wanted, on the contrary, to kick-start investment activity and household consumption.

When the US Fed's entire balance sheet grew to nine trillion dollars, the central bank slowly began to tighten it. Eventually, it was able to reduce it significantly to around USD 6.5 trillion. That is a noticeable reduction, but we are still at twice where we were before the covid pandemic broke out.

Already on 29 October, the Fed announced that it was ending the tightening and turning the rudder. Technically, it says it will not ease, but bond purchases will still occur. In fact, it will be sending the proceeds of the mortgage bonds that it has also been buying and also owns into US bonds. And that must necessarily have an effect on their price and therefore on their yield. That, in turn, is what the markets like.

If the estimate that roughly USD 15 billion a year would be sent into bonds in this way were to come true, it would be a significant relief to the US Government, which would have to cover about a tenth of its needs arising from its ever-increasing indebtedness.

And although the rhetoric of the US President does not match this, the debt is indeed growing significantly and Donald Trump is so worried about the interest on it that he regularly presses the central bank to help him indirectly with lower rates. Bond purchases don't directly lower rates, but the impact is similar.

The markets like it because with such purchases, the government's hands are somewhat freed up and investment activity is also kicked up a notch, including purchases of whatever current investors are holding. In other words, it is good news for those who are still betting that the markets will rise, even though they are at a peak and there is increasing talk of possible bubbles. But as long as the markets have central banks at their backs, the bubble debate is just theorising.