On the Q.T.

Shhhhhh…Did you hear that?  Policy changes are afoot globally.  Central banks around the world are quickly pivoting their positions on the global economy.  It started Wednesday with America’s Federal Reserve.  But then the Bank of England (BOE) got in on it yesterday.  After years of supporting economic output by creating money, they are starting to reverse course.

Quantitative easing (QE) is being replaced by quantitative tightening (QT).  What does this actually mean?  Fortunately, the central bankers told us their plan.  On this side of pond, June 1^st is the start date.  At that time, the Federal Reserve will begin shrinking its balance sheet by $30 billion in Treasury securities a month for three months.  Then this drawdown increases to $60 billion a month in September.  Simultaneously, they will decrease their holdings of mortgage-backed securities by $17.5 billion through August, then jump it to $35 billion the next month.

England’s central bank (established in 1694) is embarking on a similar journey.  They announced they’re ending support for corporate bonds in September.  This will reverse the support which started during the aftermath of Brexit and was expanded further due to covid.  They hope to finish their QT in early 2024.

Both banks are also raising their respective overnight lending rates.  The Federal Open Market Committee upped the ante half a percentage point on Wednesday.  This was met with a yawn in the stock market (the yawn transitioned into a scream once Chair Jerome Powell indicated hikes greater than that level were virtually off the table).   The BOE moved its benchmark rate up another 0.25 basis points on Thursday.

Quietly, the economy is slowing.  Atlas has been writing about deceleration all year long.  We’ve even got more to say on it next week already.  Taking away liquidity (by not reinvesting proceeds from maturing bonds and selling others outright) isn’t likely to help output.  But they are targeting inflation and are less concerned about the pace of growth right now.  Arguably, the central bank is trying to curb demand in ways inflation alone hasn’t been able.  Central bankers hold little to no sway over supply chains, so going after demand is their only option.  It’s not clear whether they’ll be able to produce a soft landing (i.e., slow output but keep the economy out of recession).  Markets are likely to offer some insight about the likelihood of the Fed’s success.  Given yesterday’s reaction, I wouldn’t’ call it optimistic.  Thus far, it is too early to tell, but market participants are not keeping their sentiments on the Q.T.