Why the Fed's debate about shrinking its balance sheet really matters

Expected withdrawal of QE

Russ Mould, investment director at AJ Bell, reflects on how the latest Federal Reserve minutes show the US moving towards a withdrawal of quantitative easing and how this will test the strength of the US economy.

While any such move to reduce the size of its balance sheet and 'sterilise' QE will be seen by some as the ultimate sign of the bond-buying scheme's success - namely that the US economy is back on track 10 years after the first signs of sub-prime mortgage distress became clear and finally capable of functioning without emergency support. Yet sceptics will argue this is the ultimate test of not just the US economy but America's stockmarket.  Even bulls of the S&P 500 used to regularly parade the chart below, which maps the size of the Fed's balance sheet against the headline US index, ...