Quantifying QT, some context ...
There is an unwritten law of large numbers. State them, scare (or delight) those who understand them. Produce CLICKS. Win (another) II popularity contest.
That in mind, the latest (scary / delightful) CoTD from German bank analyst who remains one of the ‘fan favs’,
3tn of QT coming?
Last week our US economists adjusted their Fed call to expect 4 hikes this year with liftoff in March, and said they expected quantitative tightening to start during the summer.
Yesterday Matt Luzzetti and rate strategist Steven Zeng put a note out with further details of how they expect this to proceed (link here), and under their projections the Fed balance sheet would peak just under $9tn after QE completes in March, before falling back to eventually approach 20% of GDP from over 35% today, and around a third smaller than this peak. That's a level more consistent with the pre-covid experience and a potential target highlighted by Governor Waller. Under this projection, the balance sheet would reduce by $560bn this year and $1tn in 2023. For context, between October 2017 and August 2019, QT reduced the balance sheet by around $700bn from c.$4.47tn to $3.76tn.
The report approximates that a $650-700bn drawdown equates to around a 25bps hike so out to end 2023 they think the reduction will be equal to c.2.5 hikes. See the report for full details.
FWIW, my personal view is that the balance sheet will have to grow substantially again in the years ahead as the authorities are forced to use financial repression in order to make the growing public debt burden sustainable. The path outlined in the report is also likely to be at the mercy of financial conditions. 2018 was evidence that reducing liquidity eventually bites. The Fed then had the luxury of a dovish pivot as inflation trended back down towards and below 2%. Will they have the option to be as flexible this time?
(source link HERE) and it’s this analysts PERSONAL VIEW that we’re once again in the Hotel California of monetary policy
(right — sparing you another link TO a European Vacation analogy — which remains MY go to analog…