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"First, Wall Street seems to have a blind spot when it comes to tightening via the Fed’s balance sheet. Such tightening has been attempted only once before, and economists say rate increases are much easier to model than quantitative tightening. In that way, many participants assume QT won’t have much impact. Second, the lack of discussion around QT is leading to public misunderstanding. Some investors doubt that the Fed is following through so far on its balance-sheet tightening plan, particularly on the MBS side."
Steve Rattner of Willett Advisors is worth a listen on this week’s Wall Street Week. Comes in about half way into show. Expects investors to be blind-sided by upcoming FOMC actions.
Mr. Rattner believes markets are overly optimistic about how much the Fed will need to hike rates. He contends rates will have to increase substantially since the embedded rate of inflation is 4% - 5%. He is currently fairly bearish on stocks.
I seem to recall rattner and josh brown are connected through a podcast or something? Together with Ritholtz and Danielle Park, they are names that make me perk up and pay attention. ***Edited to add: no, I had the wrong fellow in mind.
Rattner manages Michael Bloomberg’s personal wealth and also his philanthropic investments. So they provided a disclaimer early on. He seems of a more liberal social / political bent than your typical big time money manager. I didn’t care for the first 2 guests. Not bad. Not great. Rattner strikes me as a sharp dude. Didn’t bother listening to somniferous Larry.
The QT equation tends to get overlooked by many. The Fed really is walking on eggs here in trying to unload their significant bond holdings. Throw in a war in Europe, conflict with China, increasing discord at home as the 2024 elections near … Anybody’s guess how this all plays out.
Funny you should mention this. This is not intended as a slight against Mr. Summers, but while watching the past few Wall Street Week episodes I dozed off during his segments. I probably should get some more sleep...
Barron's article has 2 charts that cannot be linked except as screenshots. But I find that less appealing. FRED is cited as reference, so I created those 2 charts using FRED - see links at the end. The articles goes on to explain that appearances are deceptive and the Fed is allowing 3-mo settlements for its MBS purchases and is also reinvesting paydowns. And then notes the QT bump (as planned) coming in September. A short synopsis is in my Part 2, LINK:
"ECONOMY. People are confused by the Fed QT (or, -QE). Some even wonder if QT has started – yes, in June. Right now, the roll-offs are at a half-pace, the MBS at -17.5 billion/mo, the Treasuries at -30 billion/mo but those will become full strength in September (to -35 billion/mo and -60 billion/mo, respectively). So, why haven’t the Fed balances of MBS declined, although the Treasury balances have declined some? Well, the Fed allows 3-mo settlements for MBS bought to lessen any housing market disruptions, so yes, the MBS declines are surely coming. Moreover, any mortgage paydowns are being reinvested. So, the QT will become more visible after September. But remember that QT has been tried only once before and it amounts to an effective rate hike of an unknown amount, so the Fed is being cautious. Also, dollar strength had the effect of an additional rate hike of unknown amount. Remember all this going on in the background as most people are focused only on fed fund rate hikes. Also, that the QE had an effect, so will the reverse QE, or QT."
Comments
He contends rates will have to increase substantially since the embedded rate of inflation is 4% - 5%.
He is currently fairly bearish on stocks.
The QT equation tends to get overlooked by many. The Fed really is walking on eggs here in trying to unload their significant bond holdings. Throw in a war in Europe, conflict with China, increasing discord at home as the 2024 elections near … Anybody’s guess how this all plays out.
Funny you should mention this.
This is not intended as a slight against Mr. Summers, but while watching
the past few Wall Street Week episodes I dozed off during his segments.
I probably should get some more sleep...
"ECONOMY. People are confused by the Fed QT (or, -QE). Some even wonder if QT has started – yes, in June. Right now, the roll-offs are at a half-pace, the MBS at -17.5 billion/mo, the Treasuries at -30 billion/mo but those will become full strength in September (to -35 billion/mo and -60 billion/mo, respectively). So, why haven’t the Fed balances of MBS declined, although the Treasury balances have declined some? Well, the Fed allows 3-mo settlements for MBS bought to lessen any housing market disruptions, so yes, the MBS declines are surely coming. Moreover, any mortgage paydowns are being reinvested. So, the QT will become more visible after September. But remember that QT has been tried only once before and it amounts to an effective rate hike of an unknown amount, so the Fed is being cautious. Also, dollar strength had the effect of an additional rate hike of unknown amount. Remember all this going on in the background as most people are focused only on fed fund rate hikes. Also, that the QE had an effect, so will the reverse QE, or QT."
FRED - MBS https://fred.stlouisfed.org/graph/?g=SxNg
FRED - Treasuries https://fred.stlouisfed.org/graph/?g=SxNo