Better pay off those adjustable rate credit cards before the Federal Reserve takes a chisel to its enormous balance sheet. 

"We expect balance sheet adjustment to start in September and the Fed hiking cycle to resume in December," Goldman Sachs chief economist Jan Hatzius wrote in a note Saturday ahead of next week's Federal Reserve meeting. "With respect to the balance sheet, we assume initial caps on the amounts of securities that can run off in any given month of $10 billion for U.S. treasuries and $5 billion for mortgage-backed securities, that rise over four quarters to caps of $40 billion and $20 billion, respectively."

As TheStreet has reported, the Federal Reserve may begin later this year to shrink a balance sheet that has swelled to $4.5 trillion after the financial crisis. To pull this off, the Janet Yellen led Fed would likely use a system of gradually increasing caps to salve concerns about how much liquidity would be pulled from markets each month.

Fed chairman Janet Yellen.
Fed chairman Janet Yellen.

"The caps would initially be set at low levels and then be raised every months, over a set period of time," according to minutes of the central bank's monetary policy committee meeting in early May. The Fed began buying Treasury bonds and mortgage-backed securities by the billions per month to stimulate economic growth after the 2008 crisis froze credit and sent unemployment soaring; its total assets rapidly quadrupled.
 
Nearly all Fed policymakers "expressed a favorable view of this general approach," according to the minutes. "Limiting the magnitude of the monthly reductions in the Federal Reserve's securities holdings on an ongoing basis could help mitigate the risk of adverse effects on market functioning or outsized effects on interest rates."
 
So far, investors have largely ignored the threat of sharply higher interest rates as the Fed unwinds its balance sheet. With almost reckless abandon, the market has sent tech names such as Apple ( AAPL - Get Report) , Facebook ( FB - Get Report) , Netflix ( NFLX - Get Report) , Alphabet  ( GOOGL - Get Report) and Nvidia ( NVDA - Get Report) through the roof with rates low and the system awash in cash.
 
Time will tell how long such ignorance can stay intact.
 
Apple, Facebook and Alphabet  are holdings in Jim Cramer's Action Alerts PLUS Charitable Trust Portfolio. Want to be alerted before Cramer buys or sells AAPL, FB or GOOGL  ? Learn more now.
 
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