The Journal Gazette
 
 
Friday, January 14, 2022 1:00 am

Investors turning queasy as easy money vanishes

STAN CHOE | Associated Press

NEW YORK – The shakiness hitting Wall Street isn't just because the Federal Reserve's money printer that's supporting markets is slowing, but that it may soon go into reverse.

With inflation high and the economy strengthening, the Fed has warned investors the ultra-easy conditions it's created for them in recent years are likely to disappear. It appears on track to raise short-term interest rates earlier and more aggressively than previously expected, and it may also soon start letting go of some of the trillions of dollars of bonds it's bought since the pandemic began.

While the first possibility would be a negative for Wall Street, it's something for which investors have been preparing.

The second possibility, though, was a surprise when it was included in the minutes for the Fed's latest policy meeting, which were published on Jan. 5. Fed Chair Jerome Powell talked about the possibility again Tuesday in testimony on Capitol Hill.

It was only recently that investors got used to the idea of the Fed merely slowing its monthly purchases of bonds.

Since early in the pandemic, the central bank has been creating money to buy bonds in hopes of keeping long-term interest rates low and juicing the economy. The practice is called “quantitative easing” by economists. More colloquially, it's called “printing money.”

The bond purchases and record-low short-term rates of nearly zero helped push up prices across markets in recent years. It also made investing notably easy, with relatively shallow scary patches marring the big returns.

Along with a suite of easy-to-use trading apps, that helped draw a new generation of investors into the market. Their reward? If they simply bought an S&P 500 index fund and sat on it last year, they made nearly 30%.

But now, instead of just a “taper” of purchases, with the Fed on track to close out its bond buying in March, markets are expecting an abrupt shift to “quantitative tightening.”

“We will have the ability to move sooner and to move a little faster than we did last time,” Powell said Tuesday. “More clarity is coming soon on that.”

The last time the Fed was shrinking its massive trove of bond holdings and raising short-term rates in tandem, the S&P 500 tumbled nearly 20% in three months at the end of 2018. It didn't recover until after Powell sharply pivoted in January 2019 by saying the Fed would be patient in its policies to withdraw some of the stimulus it had injected into markets.


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