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This is an audio transcript of the FT News Briefing podcast episode: The Fed’s Big Shrink

Marc Filippino
Good morning from the Financial Times. Today is Wednesday, January 12th, and this is your FT News Briefing.

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US regulators now have a green light to try and break up Facebook. The latest US inflation numbers are out today. Plus, the Federal Reserve has a nearly $9tn balance sheet. It’s from the giant bond-buying strategy used to prop up the economy during the pandemic.

Eric Platt
This isn’t like trying to skip rocks on a lake really. This is, they have thrown boulders into this lake to get the water (inaudible).

Marc Filippino
We’ll take a look at how the US central bank will remove the stimulus programme without churning the economic waters. I’m Marc Filippino, and here’s the news you need to start your day.

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A US federal judge yesterday allowed an antitrust case against Facebook to proceed. US regulators have been attempting to sue the social media site. The same judge dismissed the government’s lawsuit last year. It said the Federal Trade Commission didn’t have enough facts to show that Facebook, now called Meta, has monopoly power. The FTC has provided more evidence to make its argument that Meta has a stranglehold on the social network market because it owns WhatsApp and Instagram. It wants to force Meta to unwind the acquisitions of those two apps. Meta has until January 25th to respond.

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Tech stocks made a bit of a comeback yesterday. The Nasdaq was up nearly one and a half per cent. This after a sharp downward spiral. Investors seem to have been heartened by comments made by Fed chair Jay Powell. He was on Capitol Hill yesterday for his renomination hearing and told lawmakers he would get a handle on inflation.

Jay Powell
We will use our tools to support the economy and a strong labour market and to prevent higher inflation from becoming entrenched.

Marc Filippino
We’ll see the latest US inflation report this morning. Consumer prices for December are expected to show a 7 per cent year-on-year rise, but our US economics editor Colby Smith says on a month-to-month basis, price gains are expected to level out.

Colby Smith
So you’re going to see the CPI potentially rise just 0.4 per cent between November and December, as opposed to 0.8 per cent in the previous period. These are still really substantial month over month increases, and I think that, yes, it’s encouraging to see a slight moderation there, but it doesn’t necessarily change the broader narrative that inflation is something that policymakers need to be paying quite a lot of attention to.

Marc Filippino
So Colby, when the inflation report comes out, what are you looking for and what are analysts going to be looking at in particular?

Colby Smith
I think what everyone is paying most attention to is if we’re going to see further evidence that inflation is picking up in a broader swath of the economy here. That’s something that’s really been the highlight of most recent inflation reports is that we’re really seeing price gains in a number of sectors and beyond those that were just kind of most impacted by supply chain issues and pandemic related distortions like we saw earlier in 2021. I think what people are going to be paying a lot of attention to is if we’re seeing it specifically in service related sectors, which could mean that, you know, some of the wage increases that employers have had to give to their workers, if those are filtering into higher prices for everyday Americans.

Marc Filippino
So on Monday, Colby, Fed vice-chair Richard Clarida resigned three weeks before his term ended because of a trading scandal. He’s now the third Fed official in the past few months to resign because of trades made around the loose monetary policy the Fed introduced back in 2020. Did Powell have anything to say about that?

Colby Smith
Powell faced a couple of questions on the ethics scandal at the Fed. I think more than as, more than anything else, policymakers wanted to ensure that the new rules that the Fed rolled out in October change exactly what Fed officials can trade and when they can do so. And I think policymakers just want to know that those rules are being put into place soon and that the Fed is really taking this situation seriously because there are quite a lot of questions about what it all means for the Fed’s credibility here, when, you know, three of its top officials have resigned in recent months over their trading activity.

Marc Filippino
That’s our US economics editor Colby Smith.

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So we’ve been talking a lot about the Fed’s plans to scale back its asset purchase programme, and we want to dig into that a little bit now because it’s really a big deal. We’re talking about all the bond-buying that the Fed’s been doing since the pandemic started in order to keep the economy afloat.

Eric Platt
This isn’t like I’m trying to skip rocks on a lake, really. This is, they have thrown boulders into this lake to get the water (inaudible).

Marc Filippino
But the FT’s US markets editor Eric Platt says that those boulders — trillions of dollars in government bonds and other assets — has completely distorted global financial markets.

Eric Platt
So the Fed having such a large footprint on global financial markets really takes away the signals investors, economists, everyone gets from the bond market. What does it mean when you have a price-insensitive buyer hoovering up debt? They will pay, when they were doing this, really any price for the bonds. It doesn’t matter. And then, you take a step back, it’s not just the Fed doing this, right? It’s the European Central Bank, it was the Bank of England. You had global central banks across the world turning to these policies. And that had an effect of pushing up stock prices, prices of corporate bonds across the world.

Marc Filippino
But now that the economy is doing OK and we have this inflation problem, the Fed wants to shrink this abnormally big balance sheet, you know, withdraw the stimulus, try to get back to normal. Eric, are investors eager for this?

Eric Platt
Yeah. I think, when I, when we speak to investors, they would love to see it overall with less distortion. I have to really quickly caveat that, though. It has been in their best interest for the Fed to be in these markets because it supported asset prices. So when the Fed was buying treasuries at any price, if you held treasuries, that was great for you, right? The price of treasuries was rising. You have to wonder like, you know, how far and how long can the Fed do this? And does the Fed risk credibility issues? Does that risk political issues if it’s leaving a mark on markets for too long? And that’s why you’re seeing calls for the Fed to start backing away because people don’t think, you know, this bond-buying programme really is necessary given the recovery we’ve seen in both the economy and the labour market.

Marc Filippino
OK, let’s move to the nitty gritty of actually selling these bonds and shrinking its abnormally colossal balance sheet. What is the strategy and what are the considerations from what you can tell so far?

Eric Platt
So the Fed has to decide how much of an impact it wants to have on financial markets and financial conditions and what it’s willing to tolerate in terms of market volatility as it starts to unload these assets. Let’s say the Fed were to tighten too quickly, start selling off bonds too rapidly. Financial markets get spooked. The S&P 500 drops 10-20 per cent in a short timeframe, right? Suddenly, if you’re a corporate treasurer, you’re thinking, oh, do we really want to be spending money right now? You start to see confidence come back. What consumers say, do I need to buy that sweater or should I be putting that offer on that home right now? And so in thinking of that, what will the Fed do? The Fed doesn’t have to actually sell them. It can just allow the treasuries that it’s purchased, the bills and bonds, to mature. And in doing so, the size of its balance sheet will begin to decline. If the Fed wants to be more aggressive, it can actively start to sell those securities, which means maybe if it’s holding, let’s say, a treasury note that would mature in a year, if instead the Fed decides to sell it now, it’s going to have a faster impact in terms of tightening and greater impact in terms of market reaction because then you have an active seller in the market.

Marc Filippino
Eric Platt is the FT’s US markets editor.

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Before we go, the hot new accessory this winter, at least in the UK, is the hot water bottle. Remember those humble rubber pouches that mom would slip under the blanket to heat up the sheets on a cold winter night? I don’t, because it’s kind of a British thing. But anyway, upscale retailers have made rubber heater covers into a must-have fashion item. They’re making covers of cashmere or Belgian linen. I didn’t even know that was a thing. There’s even a sequin embellished velvet hot water bottle cover selling for £365, bottle not included.

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You can read more on all of these stories at FT.com. This has been your daily FT News Briefing. Make sure you check back tomorrow for the latest business news.

This transcript has been automatically generated. If by any chance there is an error please send the details for a correction to: typo@ft.com. We will do our best to make the amendment as soon as possible.

 


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