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US Federal Reserve
OpinionComment
Kerry Craig
Kerry Craig

Macroscope | Federal Reserve’s quantitative tightening plan is a welcome dose of predictability

  • While the shift from quantitative easing to tightening has happened very quietly, the path for running down the balance sheet was well telegraphed by the US central bank
  • This is in sharp contrast to the rhetoric from several Fed officials on interest rates

Reading Time:3 minutes
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An eagle sits atop the US Federal Reserve building’s facade in Washington. Photo: Reuters
Kerry Craig
The last few weeks have been a rough ride for investors as they hoped for a peak in inflation that proved not to be, and central banks acted to front-load further interest rate increases. The fallout for both equities and fixed income markets has been clear.
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The US equity market fell further into bear-market territory – down more than 20 per cent from its high in early January – and yields on government bonds rose. However, what is striking about all of the discussions around the market and economic outlook for the United States of late is what is not being said, specifically quantitative tightening.

For a long time, nearly every conversation revolved around the size and composition of central bank balance sheets. Quantitative easing went from being unconventional to mainstream monetary policy, and one that is still being pursued by the Bank of Japan.
When the US Federal Reserve and other major central banks around the world were purchasing hundreds of billions of dollars each month in government bonds and other securities, this was viewed as one of the dominant factors when assessing the outlook for markets. That speculation extended to what would happen when the money tap was turned off.

With central banks, particularly the Fed, preoccupied with the size and number of interest rate increases, it’s starting to become evident that the shift from quantitative easing to quantitative tightening has happened very quietly in the background.

02:09

US Fed raises interest rates by 0.75 percentage point, the biggest hike since 1994

US Fed raises interest rates by 0.75 percentage point, the biggest hike since 1994

Earlier this month, the Fed took the first step in its balance sheet unwinding by allowing billions in US Treasuries and mortgage-backed securities to mature and roll off the balance sheet without being replaced. The path for running down the balance sheet was well telegraphed by the Fed and had a clear structure.

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