Trader Insights

Markets That Matter – 2022 January – Newsletter

Welcome to 2022! It is certainly an interesting time to be in the markets…

40-year high inflation in the US yet equity indices remain near ATH’s, the president of an actual country keeps buying Bitcoin and seemingly doesn’t care about his country’s debt being downgraded by rating agencies, while crypto + the metaverse continue to go mainstream as US giant Walmart is the latest to get involved. In the first letter of the year, we look at ways the Fed aims to tackle inflation, the impact of rising (bond) yields on risk assets and the potential for Oil at $100 per barrel. 

Quantitative Tightening (QT)

What is it?

Goodbye QE, hello QT! As the Fed continues with it’s hawkish tilt in an attempt to tackle multi decade high inflation, the latest talk is that they will commence QT this year. So, what is it?

  • QT is the opposite of quantitative easing (QE), where the central bank increases the size of it’s balance sheet. While the intention of QE is to stimulate the economy by lowering the cost of funding and increasing wealth, QT aims to decrease liquidity in the economy
  • The Fed will aim to reduce the size of its balance sheet, by either selling bonds it’s been purchasing or simply by not reinvesting when bonds mature
  • QT could be seen as bearish for risk assets due to the signal it gives of the Fed softening it’s support for markets

Why does the Fed want to do it?

  • Signal to the markets that it’s ready to fight inflation
  • Lower interest payments entailed by its forthcoming hiking cycle. The Fed could be concerned by the size of the interest payments it will have to make to banks as it tightens policy.

When could it start?

In his 11 January confirmation hearings, Fed Chair Jerome Powell stressed that the Fed would need 2-4 meetings to finalise the details, which suggests a mid-2022 start.

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