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Quantitative tightening

During the GRC, the Fed was doing many thing unusual in order to stimulate the economy by printing money, dropping interest rate and buying billion $ of mortgage and treasury bonds (QE) monthly. Fast forward to today, Fed has stopped buying bonds. Don’t hear much about quantitative tightening and how this impacts the market. Any insights?

Comments

  • From this week’s Barron’s (September 12):

    “The Federal Reserve now owns about a third of both the Treasury and mortgage-backed-securities markets as a result of its emergency asset-buying to prop up the U.S. economy during the Covid-19 pandemic. Two years of so-called quantitative easing doubled the central bank's balance sheet to $9 trillion, equivalent to roughly 40% of the nation's gross domestic product.”

    What could possibly go wrong?
  • There is quite a bit of talk about QT and that it going full steam from mid-September at -$60 billion/mo for Treasuries and -$35 billion/mo for MBS. This can go on for a while.

    Also mentioned is that the Treasury market is large and liquid and can handle -$60 billion/mo as roll off. But MBS market is not large or liquid enough and -$35 billion/mo cannot be achieved through roll off alone. So, that means that the Fed would have to sell some MBS. Impact of that would be felt in mortgage rates.

    What is less talked about is the indirect rate increase effect of QT and there are some guesstimates on it. But even the Fed isn't clear on this. There isn't much history on QE or QT (remember, QE was considered a new innovative tool). All one can say is that the mix of rate hikes and QT is a potent combo and its effects are underappreciated.

    As has happened in the past, monetary tightening tends to produce some financial accident, crisis or disaster (here or globally). We don't know if the collapse of speculative stocks and cryptos were those - so, keep your fingers crossed and be on the lookout for more disasters.
  • edited September 18
    Thanks for your comments.
    As has happened in the past, monetary tightening tends to produce some financial accident, crisis or disaster (here or globally). We don't know if the collapse of speculative stocks and cryptos were those - so, keep your fingers crossed and be on the lookout for more disasters.
    Gotta love those experiments. Problem is the entire world has been doing the same thing.

    What the the consequences of unloading $9 trillion dollars of MBS and treasury?
  • edited September 11
    There is a huge gap in expectations between retail investors and hedge funds as to effects of QT. The reason for this gap could be low unemployment, high job openings, wage growth, and low productivity. If you have a job and getting good raises while producing less, you can not be blamed for believing rosier projections and Fed saying it’s goal is soft landing. So employment of white collar workers could be key to the equity and other risk markets, the current appetite for which is still high.
  • edited September 17
    Anybody have even a guess on how much the Fed MBS purchase plan termination will impact mortgage rates in the near-term?

    Could there be a mini-spike from here?

    The current 30 year fixed rate seems to be around 6.2%.
  • edited September 18
    No one really know the consequences of unwinding of mortgage bonds on Fed’s balance sheet.

    Even if I have the money, don’t think I want a vacation home at 6% rate? Throughout the pandemic, we had inexpensive car camping trips at national parks on the west coast.
  • edited September 18
    I read Bloomberg article last wk. Worth look at it again, it sounds like QT may have minimal impact to market but to early to tell and no one really knows, first time this ever happens.

    https://www.bloomberg.com/opinion/articles/2022-08-31/federal-reserve-quantitative-tightening-fallout-should-be-limited


    ***Although throughout history there have been a few times when central banks had successfully reduced their balance sheets assets, this is an unusual time. The extraordinarily large reverse repo balance shows the true extent of the extra liquidity in the financial system. So as QT unfolds, it will be important to watch whether the reverse repo balance declines and how fast. The QT numbers appear large, but when compared to the fluctuations from the TGA account and the reverse repos, the scheduled increase is rather tame.****



    Google search incognito if want read whole article
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