10 years on from the Great Financial Crisis, the US economy is in better shape and the Federal Reserve (Fed) is getting ready to take another step towards normalising monetary policy by reducing its bloated balance sheet, which will have implications for the gold market.
In the short term, there is potential for an equity and bond market correction as the Fed's balance sheet normalises-this may be bullish for gold; however, the shrinking balance sheet will diminish the inflationary threat from the excess reserves it has accumulated. In the long term, this vote of confidence in the US economy is likely to impose downward pressure on gold prices.
Bloating the balance sheet In 2008, the Fed embarked on a massive bond-buying programme in an attempt to stimulate the economy by bringing down long-term interest rates which had spiked after the US economy fell into recession following the Great Financial Crisis. The three rounds of large scale asset purchases that took place between 2008 and 2014 helped bring the financial stability back, but at a price. Following this innovative approach, the Fed's balance sheet underwent a sharp expansion as it went from less than $900 billion in 2006 to approximately $4.5 trillion today.
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