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Into The Shadows: How Many Rate Hikes Is QT Worth?

"...the market’s focus on the import of the balance sheet is likely puzzling for Fed officials."

"...the market’s focus on the import of the balance sheet is likely puzzling for Fed officials."
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2 comments on “Into The Shadows: How Many Rate Hikes Is QT Worth?

  1. How long did it take to unwind the balance sheet post WWII ? It was the 1980’s.

  2. The FED balance sheet unwinding apparently shouldn’t have an impact when compared to other monetary flows and aggregates.

    In 2018 US had a budget gap of 780bn$, new Government bond issuances for 1340bn$, the US debt increased by 1260bn$.

    Yesterday you wrote about the private debt that has reached 700bn$

    Leveraged loans and issuances of corporate bonds increase by billions every month.

    This last January deals for 275bn$ (187 in North America) have been announced in the merger & acquisition business. We know that at least half of that will be funded with bond issuances.

    All this and the market doesn’t care, but 50bn$ Fed unwinding is a problem?

    Either it’s true that it’s just psychology or it has to do with some mechanisms, dynamics of actors involved.

    To my knowledge there is ample liquidity in the system (excess reserves) but for some reasons at same dates suddenly liquidity becomes stretched, and primary dealers / market makers are unwilling to commit their balance sheet. Like end of May 2018, start of February 2018, or the last day of the year when the repo rate jumped. It’s a key element for those sudden corrections that come from nowhere (and are justified ex post with some contradictory theories in the press and/or market lore, one day it’s higher bond yields/inflation, next day the coming recession). To understand more about this can give a real edge on the markets.

    I’m reading a paper released by the ECB this week, “Availability of high quality liquid assets and monetary operations”, if I find something interesting I will post it here.

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