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And what the Fed chair definitely won't tell you is that this mess will be all the more catastrophic because of the Fed's own policies over the past 12 years.Since 2009, the Federal Reserve has injected extraordinary quantities of easy money into the Wall Street banking system in an attempt to boost the economy. And every time the Fed has tried to ease up on this firehose of cash and started to raise interest rates — as it will try to do again this year — investors dumped anything risky and markets fell. In turn, investors — from average Americans saving for retirement to complex hedge funds — are forced into what has become known as the "search for yield," a scramble to earn what they need by putting their money into riskier investments.Trillions of dollars injected into the system forced investors to chase yield by putting their money in risky assets like shares of unprofitable companies, securitized leveraged loans, and bonds for shady overseas companies. This, in turn, created what Wall Street traders call the "everything bubble." Usually, asset bubbles pop up in a certain segment of the economy, like housing or high-flying tech stocks, but traders are worried that the search for yield has pushed so many dollars into so many risky assets that the bubbles are everywhere at once.These bubbles are the source of the Fed's current dilemma. But when interest rates go up, investors can start earning more money in safe havens like the 10-year Treasury and pull back from the risky investments they were incentivized to make over the last decade. Back then, the Fed raised interest rates slowly but steadily, while at the same time withdrawing some of the new cash it had injected into the banking system through quantitative easing.The result was a scary and synchronized downturn in late 2018 that hit all kinds of markets, with stocks, bonds and commodities falling in unison. When interest rates are near zero, it's cheap for companies to simply issue debt and use the money to invest in new equipment or buy back shares of their own stock. So when the Fed starts to hike rates, and it becomes more expensive to pay back those loans, these companies and the investors who own their debt may find themselves in a mess like the housing crash of 2008. When the Fed announced a slowdown in quantitative easing in 2013, the market adjusted immediately, and investors sold off riskier government debt. It stands to reason that a similar effect would unfold when the Fed begins to back off its current quantitative easing program again this year.It is hard to see how any of these asset classes — tech stocks, corporate debt, and emerging-market debt — can survive in a world where the Fed hikes interest rates to anything like 3% while simultaneously pulling back on its cash injections through quantitative easing.
As said here by Christopher Leonard