https://www.bloomberg.com/news/articles/2022-06-01/fed-starts-experiment-of-letting-8-9-trillion-portfolio-shrink

How low can they go?

They tried shrinking in 2018 and had to reverse course in 2019 after the market went down 20% from its highs.

The market has already sold off knowing this QT is coming.

My guess is that interest rates will start coming back down to level things off.

Outdoorag011 said:

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https://www.bloomberg.com/news/articles/2022-06-01/fed-starts-experiment-of-letting-8-9-trillion-portfolio-shrink

How low can they go?

They tried shrinking in 2018 and had to reverse course in 2019 after the market went down 20% from its highs.

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agreed, the Fed has been trying to jaw jaw the markets through statements and press conferences.

they don't want to ever have to really raise rates or engage in QT- they know it will start to destroy the economy.

what do you call a 31 trillion dollar debt with rising interest payments?

From my extremely limited knowledge and what I've read about QT it will be a headwind for stocks. Does that mean bonds are a better asset to hold during QT?

HumpitPuryear said:

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From my extremely limited knowledge and what I've read about QT it will be a headwind for stocks. Does that mean bonds are a better asset to hold during QT?

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obviously the reason stocks tend to go down when rates are rising is because more people are piling into better bonds. at this point in history, bonds are no miracle cure either. 10 Year still can't even get to 3.0%.

I thought the reason was moreso that "unwinding the balance sheet" is essentially flooding the market with a supply of investments (e.g., MBS) which pushes down prices/increases yields. Higher rates mean future cash flows are more heavily discounted (which impacts high-flying growth stocks like FAANG most of all). And if that all tracks, higher rates also mean existing bond prices will suffer. Not sure there is anywhere to hide (if you need your principal back in the near future).

thisguy05 said:

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On the other side of the ledger, can anyone more offer any insight into why the Fed is slow-walking rate hikes? Every time a FOMC member speaks it is about future 50 basis point hikes. Why not jack them up faster?

I think the reason is to try to thread the needle to whip inflation without causing a recession. I don't believe that is possible.

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A more severe rate movement will almost certainly lead to a much more severe impact on slowing economic growth. They aren't explicitly trying to avoid a recession, they are trying to land as softly as possible.

Bird Poo said:

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Casey TableTennis said:

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thisguy05 said:

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On the other side of the ledger, can anyone more offer any insight into why the Fed is slow-walking rate hikes? Every time a FOMC member speaks it is about future 50 basis point hikes. Why not jack them up faster?

I think the reason is to try to thread the needle to whip inflation without causing a recession. I don't believe that is possible.

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A more severe rate movement will almost certainly lead to a much more severe impact on slowing economic growth. They aren't explicitly trying to avoid a recession, they are trying to land as softly as possible.

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So it seems that one way to avoid raising rates, from a political standpoint, is to jack up the price of oil. Slows down the economy and you get to blame big oil!

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I view current state of oil prices as Biden administration ineptness rather than some grand plan to circumvent the need for rate hikes. Energy costs are in fact a significant underlying leg of inflation, necessitating faster rate hikes than previously planned.

Biden Inflation similar to highest level of 1980 new study shows

Democrat Larry Summers says Inflation now at 1980 level

Didn't the Fee just buy like $10B in treasuries yesterday? I don't trust anything these yahoos say.


Transitory

Ragoo said:

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The market has already sold off knowing this QT is coming.

My guess is that interest rates will start coming back down to level things off.

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Agreed. It's also too much of a political liability going into 2024 with sky-high rates along side all he other domestic issues.

Saying QT is coming and then actually reducing the balance sheet is completely different. They are using Jay powell to try and sweet talk the markets by giving them a heads up that QT is coming so that the market will price it in. But actually rolling off treasuries/mortgage back securities in the billions I believe will cause an actual sell off because they are supposed to start reducing the balance sheet in 7 days and are not even close to it. They are still buying treasuries and MBS by the tens of billions.

Confusing. They must have changed course then because they supposedly stopped buying and were selling off beginning last November.

YouBet said:

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Confusing. They must have changed course then because they supposedly stopped buying and were selling off beginning last November.

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Nope

they weren't scheduled to actually sell off the MBS until this month.

LMCane said:

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YouBet said:

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Confusing. They must have changed course then because they supposedly stopped buying and were selling off beginning last November.

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Nope

they weren't scheduled to actually sell off the MBS until this month.

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Did following not actually happen? Tapering started in November; didn't mean wholesale stop in November:

Quote:

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The first step in the tapering process will be taken in mid-November, when the Fed will reduce the pace of purchases.

• Treasury securities purchases will go from $80 billion to $70 billion a month.
• MBS purchases will go from $40 billion to $35 billion a month.

Then, in mid-December, the pace of purchases will be reduced again.

• Treasury securities purchases will go from $70 billion to $60 billion a month.
• MBS purchases will go from $35 billion to $30 billion a month.

If the economy continues to improve as the FOMC expects, then each month the pace of purchases could decline by similar dollar amounts. Assuming the recovery remains on track and the FOMC continues its monthly tapering pace, by mid-2022 the Fed will complete the taper and no longer be purchasing securities that increase the size of its balance sheet.1

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They never stopped buying. They actually did start tapering how much they are purchasing but have not started the roll off of the balance sheet. The roll off is supposed to start on June 15th. They aren't buying as much but they are still buying. The roll off part is what could get dicey. Who is going to be in the market for 4 trillion in treasuries and MBS? Big banks? I would say other countries but all the countries that have been buyers of our treasuries are net sellers at the moment.