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Fed reduces its balance sheet at record rates

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Fed reduces its balance sheet at record rates

Two forces are confronting each other in the US stock market: the bulls represented by investors who redeem shares and the bears represented by the Fed.

The buybacks amount are rapidly increasing and it is likely to make up $145 billion soon. The Federal Reserve is trying to stop further growth of the indices. The quantitative tightening reached its peak phase a month ago. The Federal Reserve is shrinking its balance sheet by $50 billion per month. The balance sheet declined by $33.8 billion only for one week ended October 31. This was the highest reduction rate per month.

The Federal Reserve’s balance sheet shrank to $4.140 trillion, the lowest level since February 2014. Moreover, the Fed also reinvests the income earned by the repayment of bonds.

It is next to impossible to predict when the loss of liquidity will affect the market. Last week the stock market prices surged upwards despite the record reduction in the Fed's balance sheet. This might have happened due to the effect of share repurchases. Anyway, the Fed is gradually winding down its balance and this will support the American dollar.

On Monday, at the end of the trading day, stock indices climbed 0.5%, except for NASDAQ which lost 0.4%. The leader traded in the red was FANG Stock which lost from 1% to 3%. The US dollar index which measures the greenback against a basket of six major currencies declined.

If the US currency continues growing, it will accelerate and it is more likely that US dollar indices will be much higher.

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