The Daily Dish
March 5, 2024
QT No Longer on the QT
This week the Federal Reserve Board (Fed) will release its survey of economic conditions known as the Beige Book, the Department of Labor will release the employment report for February, and these will produce a robust public discussion of the future path of the federal funds rate (the Fed’s policy rate). But on quantitative tightening (QT), expect radio silence.
Recall that in response to the arrival of the coronavirus, the Fed did four things. It cut interest rates to zero. It set up “facilities” where companies could get cash (liquidity) in exchange for their corporate securities. It provided forward guidance, telling markets that it would provide as much liquidity as possible for as long as necessary. Finally, it began purchasing $90 billion per month in securities – $60 billion of Treasuries and $30 billion of mortgage-backed securities. The latter, known as quantitative easing (QE), ultimately pushed $5 trillion of cash into financial markets.
When the Fed switched to an inflation-fighting stance in 2022, it began actively raising rates and passively letting up to $95 billion of the securities it had purchased mature and roll off its balance sheet each month. This “passive” QT (as opposed to actively selling securities) came with exactly zero forward guidance. The Fed has been quite vocal about its plans for rates, but has been essentially radio silent on how long QT would persist and how much smaller the balance sheet would be when it was done. QT was done on the QT.
That may now be ending. In a recent paper, Wenxin Du, Kristen Forbes, and Matthew Luzzetti studied QT around the world. The results are somewhat surprising. Writing in the Financial Times about their work, Forbes summarizes:
“QT has worked in the opposite direction to quantitative easing, but the effects are much, much more muted. More specifically, announcing the start of QT causes a modest increase in yields (of about 0.04 to 0.08 percentage points) of government bonds with maturities a year and longer. Other effects are even harder to pin down — albeit generally pointing in the direction of tighter financial conditions. These muted effects continue when central banks begin implementing the programmes and some even selling their bonds outright. There has been minimal impact on bond pricing and liquidity, to date.”
The Fed may have been reticent to come clean on its plans for QT out of a fear that QT was the mirror image of QE and that markets would be deeply affected by announcements of changes in the QT plans – just as they respond dramatically to perceived changes in the likelihood of rate cuts. More research may yield different conclusions, but for now that does not appear to be a large risk. The Fed no longer has to keep QT on the QT.
Fact of the Day
Across all rulemakings this past week, agencies published $112.5 million in total costs and added 437,936 annual paperwork burden hours.
