The publication, earlier this week, of the Federal Reserve’s Federal Open Market Committee minutes of January 29-30 seemed to have a similar effect on equity markets as a call from room service to a Las Vegas hotel suite, informing the partying high-rollers that the hotel might be running out of Cristal Champagne. Around the world, stocks sold off, and so did gold.
Here is how one may freely translate it:Guys, let’s face it: All this money printing is not without costs and risks. Three problems present themselves: The bigger our balance sheet gets (currently, $3trillion and counting), the more difficult it will be to ever offload some of these assets in the future. When we start liquidating, markets will panic. We might end up having absolutely no maneuvering space whatsoever. All this money printing will one day feed into higher headline inflation that no statistical gimmickry will manage to hide. Then some folks may expect us to tighten policy, which we won’t be able to do because of 1). We are persistently manipulating quite a few major asset markets here. Against this backdrop, market participants are not able to price risk properly. We are encouraging financial risk taking and the type of behaviour that has led to the financial crisis in the first place.