Today, June 1, the decade long policy of quantitive easing comes to an end and quantitative tightening begins.
About US$ 1T is expected to be withdrawn from the financial system by year end and at least another 1T next year. No one really knows how this will impact us, but there are lots of theories. Here’s one, from former Fed trader Joseph Wang https://fedguy.com/turbo-tightening/#more-4493
One of the things I find most unusual about this is there is very little opposition.
About US$ 1T is expected to be withdrawn from the financial system by year end and at least another 1T next year. No one really knows how this will impact us, but there are lots of theories. Here’s one, from former Fed trader Joseph Wang https://fedguy.com/turbo-tightening/#more-4493
The money supply is set to contract just as investors are clamoring for cash to hide from declines in both equities and bonds. A combination of increasing MMF allocation to the RRP and QT may drain ~$1t of bank deposits by the end of the year. The Treasury’s decision to further cut bill issuance will keep money market rates very low and likely push the RRP to over $2.5t by the end of the year. Furthermore, recent history suggests QT will largely be funded by deposits held in banking system rather than the RRP. The combination of these two mechanisms suggests a net contraction in bank deposits despite elevated bank credit creation. Investors looking to hide in cash will have to compete for a shrinking pool of cash by further lowering the asking prices of their assets. In this post we describe the mechanics behind the impending rapid withdraw of cash and suggest the market rout will continue.
One of the things I find most unusual about this is there is very little opposition.