Quantitative Tightening Moves Full Speed Ahead

As quantitative tightening moves to full speed, I thought it would be a good idea to update some of the charts from the popular "7 Charts on Quantitative Tightening" article.

The commencement of quantitative tightening (or, officially, balance sheet normalization), marked an important milestone in the history of the grand monetary policy experiment that kicked off in the wake of the global financial crisis. There has been intense debate about the efficacy and equity of QE and I'm sure that in time there will be equally strong debate and discussion about the as yet not fully known impact of QT. At the very minimum it is a key macro factor and should not be ignored, forgotten, or underappreciated for the risk-conscious investor. So this set of charts should provide a useful reference as we move further along the road in this grand experiment.

The key takeaways on quantitative tightening (or QT) are:

  • We're now at the maximum planned pace of $50B per month (vs $85B at the height of QE3).
  • Already we've arguably seen the impact of QT on the bond market.
  • We're beginning to see the impact of QT on the US dollar, and this could be just the start.
  • Similarly we're starting to see the impact of the turning of the tides in global monetary policy on global equities, as central banks move from suppressors to sources of volatility.

1. Best Laid Plans: As noted in the November Implementation Note, quantitative tightening or QT is now running at maximum pace of US $50 billion per month (contrast that to a pace of Quantitative Easing or QE of $85 billion during QE3). The initial plans for balance sheet normalization where outlined in mid-2017 and at this point no one knows, not us nor the Fed, how long the pace of $50 billion a month will continue, but the chart below shows a projection based on full use of the cap each month.

2. The Quantum of Quantitative Tightening: Using another angle, this chart shows the total amount of quantitative tightening or balance sheet reduction that has been completed so far. As of the time of writing, the Fed's holdings of treasuries have been reduced by almost $200B, and total assets have been reduced by over $300 billion now. So while the flow (recall, $50 billion max QT vs $85 billion max QE back in QE3 days) is already definitely material, the stock is also getting to a point where it's not easy to ignore or dismiss as an important issue for markets.

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