Another Small Fed Reduction Sets Up Big Drawdown Next Week

The Federal Reserve reduced its balance sheet by $2.38 billion in the week ended October 24. This small reduction leaves nearly all of October's reduction to the last week, as I wrote last week:
It still has $50 billion total and $30 billion in treasuries to go. It's already behind the curve, needing to reduce $39 billion in treasuries to catch-up. It will fall behind again this month because only $23 billion in treasuries mature.
Big Fed balance sheet reduction days have typically sent stocks lower.

On October 31, $23 billion in treasuries will mature, all of which should roll off the balance sheet. The Fed should reduce treasuries $30 billion this month and it has reduced zero. Since it will not sell treasuries, it will fall behind by $7 billion. Since the Fed has also barely reduced MBS, it should reduce by around $18 billion. This would make for the largest single weekly balance sheet reduction by a long-shot.

The market should experience a healthy dip at least one day between now and Wednesday. Given the already high volatility, it could take the market to new lows for the year.

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