With the recent Fed minutes confirming the central bank is contemplating shrinking its balance sheet, many are wondering where that leaves markets and interest rate policy going forward…The following is a summary of an FS interview with market technician Gary Dorsch, editor of Global Money Trends magazine, regarding his take on the Fed’s next move and what we can expect for the economy.

FinancialSense.com

Markets Overvalued

Ever since the S&P hit its all-time high of 2400 on March 1, the day after President Trump gave his much-lauded speech to Congress, we’ve seen it decline to near the 2354 level. Also, the Dow Industrial’s current reading of 20,600 is about 500 points off its all-time highs.

The market was overvalued on a P/E ratio, Dorsch noted, with the S&P trading at 25 times its 12-month trailing earnings, well above its historical levels.

“There are some doubts now as to whether Mr. Trump can get his grandiose fiscal policies through Congress,” Dorsch added. “There are also doubts about how much tax cutting can come about … and whether he has the pull on Capital Hill to get his policies through.”

In fact, the Fed made an effort to warn traders in the first week of March that they were moving up their rate hike schedule and reiterated that they still intend to raise the Fed Funds rate two more times between now and the end of the year.

Fed Minutes Indicate Balance Sheet Reductions Coming

Also, the Fed minutes from the March meeting hit us with a bombshell: The central bank is actively talking about reducing the size of its portfolio of bonds and mortgage notes, which total about $4.5 trillion currently.

Federal Reserve Chief John Williams would like to see the Fed start to reduce its portfolio in the second half of this year, with a goal of taking it down by $2.5 trillion over the next 5 years.

“(The figure of) $500 billion a year is probably the equivalent of an increase of 1 percent on the Fed Funds rate,” Dorsch said. “That’s about how much the Fed would have to drain out of money markets in order to sustain a 1 percent increase in short-term interest rates.”