As the Federal Reserve’s money printer quiets, markets shake

NEW YORK (AP) — The shakiness hitting Wall Street isn’t just because the Federal Reserve’s money printer that’s supporting markets is slowing, but that it may soon go into reverse.

With inflation high and the economy strengthening, the Fed has warned investors the ultra-easy conditions it’s created for them in recent years are likely to disappear. It appears on track to raise short-term interest rates earlier and more aggressively than previously expected, and it may also soon start letting go of some of the trillions of dollars of bonds it’s bought since the pandemic began.

While the first possibility would be a negative for Wall Street, it’s something investors have been gearing up for. The second possibility, though, was a surprise when it was included in the minutes for the Fed’s latest policy meeting, which were published on Jan. 5. Fed Chair Jerome Powell talked about the possibility again in testimony on Capitol Hill Tuesday.

The last time the Fed was shrinking its massive trove of bond holdings and raising short-term rates in tandem, the S&P 500 tumbled nearly 20% in three months at the end of 2018. It didn’t recover until after Powell sharply pivoted in January 2019 by saying the Fed would be “patient” in its policies to withdraw some of the stimulus it had injected into markets.

“Those are the flashbacks the market is having right now, and it’s wondering how long it will be before the punch bowl is really taken away — and should investors be positioning for that right now,” said Yung-Yu Ma, chief investment strategist at BMO Wealth Management.

It was only recently that investors got used to the idea of the Fed merely slowing its monthly purchases of bonds. Since early in the pandemic, the central bank has been creating money to buy bonds in hopes of...