As originally planned, the Fed would double the pace of shrinking its $8.9 trillion balance sheet next month, but the central bank is facing a question: Is it time to continue the pace of shrinking as the U.S. economy begins to slow? ?
The twin tightening of interest rates and balance sheet is making it harder for the Fed to achieve a “soft landing” that slows the economy but avoids a recession. With some investors believing that the U.S. economy is already in a recession, speculation has grown that if anything has to give in, it might be the speed of QT. Yung-Yu Ma, chief investment strategist at BMO Wealth Management, said:
“The Fed has some leeway to either eventually slow the pace of QT or even end it earlier than expected. But it’s hard to know how the Fed will balance these factors, and at what point does the Fed consider financial conditions to have tightened? This definition It’s vague.”
Kathy Jones, chief fixed income strategist at Charles Schwab Financial Research, said:
“We think it’s not too late for the Fed to slow. And the data has started to adjust and we’re seeing a slowdown in the economy.”
Her base view, though, is that the Fed keeps QT policy unchanged but may use it as a lever that can be adjusted in tandem with rate hikes . Jones said:
“If the rate hikes are too fast and too hasty, then the Fed has to stop QT, and if rate hikes slow and level off, they can continue QT for a longer period of time and tighten monetary policy through the latter rather than the former.”
The Fed’s balance sheet was nearly $9 trillion as of last week. The Fed’s holdings of Treasuries and mortgage-backed securities have not fallen significantly since the Fed started QT in June , but the Fed’s holdings of bank reserves have fallen to $3.3 trillion , up from $4.3 trillion in December 2021 Points fell by about $1 trillion. Analysts said U.S. bank reserves have contracted faster than many expected. In the QT before the Fed, only $1.3 trillion of liquidity was siphoned off in five years.
The Fed has yet to announce the target size of its balance sheet. Gennadiy Goldberg, senior rates strategist at TD Securities, believes that the Fed’s ultimate goal is to shrink its balance sheet to around 9% of GDP in bank reserves, which is the level in September 2019 when the Fed stopped its last QT.
Jay Hatfield, chief investment officer at New York Infrastructure Capital Management, said:
The Fed should slow the pace of QT, the market doesn’t need to cut another $1 trillion in bank reserves, it would be catastrophic for bonds and equities, unfortunately the Fed almost universally ignores liquidity and money supply. This That’s why the Fed is forever behind in controlling inflation and forecasting deflation.”