Quantitative Tightening

Quantitative Tightening

Quantitative tightening QT continues as the Fed restricts its asset purchases. The Fed’s total assets dropped again by $87 billion in June and by $667 billion since the historic peak in April 2022, according to the latest Fed’s H.4.1 weekly balance.

The Fed’s total assets stood at $8.298 trillion, the lowest amount since August 2021.

QT started in April 2022, with the downward trajectory in the Fed’s total assets steepening until the first quarter of this year, 2023.

QT reversed in the first quarter when the Fed broke the banks 

Four bank runs triggered the pivot from QT to QE, with a bank bailout adding $391 billion to the balance sheet.

The Fed is the market; QT financial asset prices fall, and QE is the reverse. 

There is a positive correlation between the magnitude of the Fed’s balance sheet and the direction of financial asset prices.

When the Fed decides that rising prices of financial assets are favourable to the banking cartel agenda, they implement a monetary easing policy. So they expand the money supply, create currency to purchase assets, which is QE and reduce the Fed fund rates to stimulate household spending and business investing in the economy.

If the Fed’s QT continues, then those believing that we are in a bear market rally could be right. It is becoming a one way bet. 

QT, the reduction of the Fed’s balance sheet has more of a direct impact on financial asset prices than the changes to the Fed fund rates. Changes to the Fed fund rates have more of a policy time lag than changes to the Fed’s balance sheet, withdrawal of liquidity has a real-time impact on financial assets. 

But if the Fed is reducing its balance sheet, meanwhile, ECB BOE, and BOJ are expanding their balance sheet, then global (western) monetary policy could still be expansionary. 

So to get an accurate picture of the Fed’s QT we would need to know what the other western aligned central banks are doing. 

The Fed’s 2022 QT is QT2 

First QT was during 2018-2019, which reduced $688 billion from the balance sheet.

The global lockdown pandemic of 2020-22 triggered a massive policy pivot from tightening to easing.

Was this the life raft for the insiders to sell at the top?

QT started in the third quarter of 2022. By the end of June, 12 months into QT2, the Fed will have unwound more of its assets than in the entire period of QT1, despite the bank-panic bailout that at the peak had added $391 billion to the balance sheet.

Mother of all events to halt QT

If the bank panic bailout is a temporary blip for QT, what other event could trigger a massive policy pivot?

Maybe falling inflation is the only event needed, after all, QT2 is looking long in the tooth as the fundamental economic data takes a nosedive.