Fed’s waning support has Wall Street rattled

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 has 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 investors have been gearing up for. 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 in testimony on Capitol Hill last week.

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.

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.”

At Deutsche Bank, economists say the Fed could trim $300 billion to $400 billion off its balance sheet in the second half of 2022. It could trim another $1 trillion in 2023, which would have roughly the same effect as two hikes in short-term interest rates.