In this article, you will get all information regarding What the Fed’s “quantitative tightening” mission could mean for markets? – WooDZog

Data: fact set; Graphics: Axios Visuals

The worst year for equities since 2008 could get even uglier as the Fed’s bid to extract potentially trillions of dollars from financial markets is in full swing.

Send the news: The Fed opened the second front in its war on inflation in recent months and began shrinking its stockpile of nearly $9 trillion in US Treasury bonds — a process known as quantitative tightening.

  • In September, it increased the rate at which it is winding down its holdings to nearly $100 billion a month.
  • The Fed will also continue to raise short-term interest rates, leading to a 0.75 percentage point hike on Wednesday for the third time in a row.

Why it matters: The Fed’s only previous attempt to simultaneously raise interest rates and reduce its holdings of government bonds has coincided with an ugly 20% sell-off in the stock market in late 2018.

  • The S&P 500 is already down 21% from its peak early this year after the Fed launched its attempt to crush inflation by raising short-term interest rates.
  • The big question: With the quantitative tightening only increasing, is the other shoe about to hit the market?

What they say: “Loss of bond market support and contraction in the financial system are fueling a new set of headwinds for the economy and financial markets,” wrote John Lynch, chief investment officer at Comerica Wealth Management.

The big picture: As the economy took a COVID-related nosedive in early 2020, the Fed began pumping newly created dollars into financial markets as part of its effort to ensure the economy didn’t become a smoldering crater.

  • It did this by buying more than $4 trillion in government bonds and government-backed mortgage bonds.
  • Buying those bonds lowers long-term interest rates, which in turn lowers mortgage and auto loans, persuading Americans to spend their money instead of holding onto it during scary times.
  • The plan largely worked and car and home sales rose during the crisis. (Some also blame it for adding to the current inflation problems.)

Between the lines: A side effect of the plan was the stock market’s record growth, as the flow of newly created money sloshed through the system.

  • The stock market rose 114% between March 2020, when the Fed announced its quantitative easing program, and its peak in January 2022.
  • Some analysts think the impact of the Fed’s money-printing and bond-buying programs could have affected the markets’ manic mood – meme stocks! SPACs! cryptocurrencies! NFTs! – over the past few years, with every small drop in stock prices being cushioned by traders rushing to ‘buy the dip’.

It comes down to: With the Fed shrinking its balance sheet — taking a cool $100 billion out of financial markets each month — some expect the massive tailwind from the pandemic era to turn into a massive headwind for an already volatile stock market.

  • The idea of ​​buying dips became firmly ingrained in investors during the post-COVID jump from mid-2020 to 2021. Many viewed it as a nearly foolproof strategy,” Steve Sosnick, chief strategist at Interactive Brokers in Greenwich, Connecticut, wrote in a recent report. note to customers.
  • “What made it work was the flow of money unleashed by a combination of rate cuts, quantitative easing and fiscal stimulus.”

What the Fed’s “quantitative tightening” mission could mean for markets? – WooDZog

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