Federal Reserve's Solar Band of Totality

People in the United States will be treated to a memorable event on August 21^st  -  a full eclipse of the sun.  In its daily route around the Earth, the Moon will travel in a path directly between Earth and the Sun, blotting out the usual yellow, bright solar view  -  at least for some people.  It is a momentous occasion given the rarity of such an event  -  once every 99 years.  It would happen more often if the Moon were in a perfect circular orbit or just a bit closer to the Earth.  As it is, the lunar orbital path is an elliptical shape.  What is more the Moon’s orbit of Earth is a bit tilted relative to the Earth’s orbit of the Sun.

Just as well the solar eclipse is not a regular occurance.  The unusual event provides us with an opportunity to pause for reflection or a handy excuse stage a good party.  Websites have popped up to help everyone from the most introspective to the carefree take in the fullest meaning or enjoyment.  Sites such as Great American Eclipse provide information on where and how to view the eclipse.  Fragile eyes can be damaged looking at the sun directly.  They recommend special glasses and ten locations in a narrow ‘Band of Totality’ across the United States extending from Oregon to South Carolina.  The rest of the country will not be left out but will only see a partial eclipse.  Funny glasses still needed.

A common eclipse theme is ‘alignment’.  Get it  -  alignment of the Sun-Moon-Earth  -  alignment of the senses  -  alignment of the party favors.  The financial sector could even undertake a grand ‘alignment’ of economic factors.  For example, there could be an alignment of financing and operations or alignment of accounting and information systems.  Corporations can align organizational goals with employee’s personal goals or align compensation of executives with shareholder interests.

Central bankers already have their own alignment underway  -  at least some central bankers.  To wit, Federal Reserve Chair Janet Yellen is attempting to align the Federal Funds rate with inflation expectations.  However, the really momentous alignment that must take place is on the Federal Reserve balance sheet where the Fed still holds over $4.5 trillion in bonds.  The Fed’s bond portfolio built up during an extended period of quantitative easing that ended in 2013.  Resale of the bonds, if undertaken at too fast a pace, could have a ‘blinding’ impact on bond values and yields.  Yellen has already warned the unwinding of the Fed balance sheet could amount to a rate increase all by itself.  Given the widespread ownership of U.S. Treasury securities, the impact would be felt not only in the U.S. but around the world.  Now there is a Band of Totality! 

When you think about it the Federal Reserve balance sheet alignment might be even more earth-shattering than the celestial event on August 21^st.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.