With regard to increasing the pace of QT, the past attempts were undertaken during periods of much lower inflation. With inflation currently much higher, dare I say it, might this time be different?
Thank you for this question which is highly relevant since the Federal Reserve will be doubling the pace of balance sheet run-off to $95 billion a month within weeks. We only have two examples of significant balance sheet contraction by central banks. That was the ECB between 2012 and 2014 and the Fed between 2018 and 2019.
Both occasions resulted in deflationary fears rising. I don’t expect this occasion to be any different. Siphoning liquidity out of the global financial system will lead to a liquidity crisis somewhere. This report from Morgan Stanley raises the point that $1.4 trillion in leveraged loans are heavily exposed to rising interest rates and could be one of the most significant sectors to exhibit pressure.
The private equity sector has massive quantities of cash sitting in funds waiting for opportunities. It has also made abundant use of leveraged loans. It is reasonable to assume when these loans start going bad, they will attempt to sell those businesses by listing on the stock market.
Quantitative tightening is a solution for monetary inflation. It will only impact the physical markets for commodities in so much as it affects demand in the economy. More than a few analysts have been commenting on the divergence between the futures and physical markets for oil. Meanwhile prices continue to contract and have completing top formation characteristics. Something every stock market investor will be alert to is the energy sector has been the single best performer for two years running. That’s not going to last if oil continue to fall.
Supply limitations in the global supply chain and geopolitical tensions are also unlikely to directly be affected by quantitative tightening. Indirectly, tighter money focused the minds of politicians on finding solutions to lower living standards.Back to top