Quantitative Tightening Has Arrived. What it is and What to Expect

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2 years ago

First of all, what is quantitative tightening? Quantitative tightening is just the opposite than quantitative easing, this is, a way to reduce the money supply in the economy. In the case of the United States, this translates into the Fed not reinvesting the proceeds of its bond portfolio which leads to lower reserves in the system and tighter financial conditions.

So, the Fed is going to start shrinking its balance sheet. This is a huge endeavor. For reference, the Fed’s balance before the Financial Crisis was a few billion USD, today that figure is around 9 TRILLION USD. This reduction will take time and could mark the end of easy access to financing.

The Fed flagged its plans to start quantitative tightening well in advanced. However, given that liquidity in the treasury market (key for US financial markets) is going to be reduced and a high inflation environment, price volatility is expected to increase.

Additionally, the Fed increased interest rates by 75 basis points yesterday (15-06-2022), the highest increase since 1994, in an attempt to reduce rampant inflation. This will increase borrowing costs for consumers and businesses and thus reduce economic activity.

Could all this be the end of cheap money?

 

This article is NOT financial advice, just a monkey typing stuff.

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