Quantitative Tightening
What is it?
Quantitative tightening is the opposite of quantitative easing. It began on Wednesday of last week as detailed in the excerpt below.
“The Fed let bonds mature off its $9T balance sheet without replacement. It’s a big step for a central bank that conducted unprecedented bond purchases from March 2020 to March 2022, which were intended to blunt the economic fallout from the coronavirus pandemic. The pullback comes at a time when the Treasury market is already grappling with periods of volatility and low liquidity, and there are many unanswered questions about the effects of the new policy regime.”*
Unprecedented is one word that we could see coming up more and more as the Fed tries to get closer to their long term inflation goals.
“‘It’s going to be very gradual… It’s just too soon to know what if anything the impact is going to be from QT,’ said Subadra Rajappa, head of U.S. rates strategy at Societe Generale.”*
Why does it matter?
“‘I don’t think we know the impacts of QT just yet, especially since we haven’t done this slimming down of the balance sheet much in history,’ added Dan Eye, chief investment officer at Fort Pitt Capital Group. ‘But it’s a safe bet to say that it pulls liquidity out of the market, and it’s reasonable to think that as liquidity is pulled out, it affects multiples in valuations to some degree.’”*
If everything else was constant then quantitative tightening would be an indication of harsher economic conditions for the stock market. However, one factor does not imply a given result with much certainty. There are many factors that contribute to the markets outside of the Fed.
“Yields should technically move higher in response to QT, while the curve should steepen, due to a tightening of financial conditions and money supply. However, the direction of yields is also highly dependent on other economic factors, like expectations of Fed interest rate hikes, the U.S. economic outlook or greater regulatory constraints.”*
Goldman Sachs Executive Warns of Economic Shock
What is it?
“A top Goldman Sachs Group Inc. executive echoed Jamie Dimon’s pessimistic tone, warning of tougher times ahead amid a string of shocks rattling the global economy.”**
“This is among — if not the most — complex, dynamic environments I’ve ever seen in my career,” Goldman President John Waldron said at an investor conference Thursday. “The confluence of the number of shocks to the system to me is unprecedented.”**
“Waldron spelled out his fear that risks from inflation, changing monetary policy and Russia’s invasion of Ukraine could kneecap the global economy.”**
Why does it matter?
The experience and expertise of Waldrop can provide a good perspective to consider. Many retail investors with less experience could be investing based on more recent market biases as opposed to a full cycle investing plan.
“We expect there’s going to be tougher economic times ahead,” Waldron said. “No question we are seeing a tougher capital-markets environment.”**
Other articles we found interesting this week:
Elon Musk tells Tesla staff: return to office or leave
Investor fears set the table for an ‘echo bubble’ down the road
Microsoft lowers fourth-quarter guidance, citing unfavorable foreign exchange rates
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Sources:
*Yoel Minkoff. “Where are Treasury yields headed as the Fed embarks on quantitative tightening?”. 6/1/2022. Seeking Alpha https://seekingalpha.com/news/3844249-where-are-treasury-yields-headed-as-the-fed-embarks-on-quantitative-tightening
**Sridhar Natarajan. “Goldman’s Waldron Warns of Unprecedented Economic Shocks, Echoing Dimon”. Bloomberg. https://finance.yahoo.com/news/goldman-waldron-warns-unprecedented-economic-133457514.html
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