Monday, June 20, 2022

Quantitative Tightening

I know I sound like a broken record. But on the subject of the Fed and ECB as inflation fighters, I shall repeat my mantra: It's the QT, the QT, QT - and not just interest rates.  

Money, and everything else that trades from microchips to potato chips, has TWO measures: quantity and price.  Interest rates are the price of money, money supply is the quantity of money. Central banks are responsible for regulating both, not just interest rates.  Particularly since they went bonkers with Quantitative Easing during 2020-22.

The chart below shows the weekly change in the Fed's balance sheet assets - at one point it was adding $400 billion of fresh money per week!  It has since eased off, but it is still adding and not subtracting liquidity to the system.

Therefore, I will know that the Fed is serious about combating inflation ONLY when the line on the chart dips well below zero and stays there for the duration.

Markets are still focusing almost entirely on rate hikes.  No one I know is even thinking about QT as a factor that will affect the market.  But as we saw a week ago in the Italian and Greek government bond markets, the ECB's pause in buying their bonds sent their yields rocketing upward, and panicked politicians immediately pressured Mrs. Lagarde into promising some sort of "tool" to protect the hapless South.  It is still unclear what she will do and what effect, if any, her "tool" will have.

Italy Government Bond Yields Rocket Upwards

No comments:

Post a Comment