What You Should Know About Quantitative Tightening (QT)
“The Federal Reserve is embarking on a new path, a path that started several years with QE (quantitative easing)” says Jim Rickards, economist and currency expert.
Rickards’ has identified the next “path” forward from the Fed as quantitative tightening, “QT,” which is the opposite of QE and will have the same effect as raising interest rates.
What is Quantitative Tightening? (QT)
As the Federal Reserve prepares to outline a blueprint for how best to reduce the current balance sheet, officials are expected to embark on a new path of quantitative tightening.Jim Rickards lays this out noting that, “the Fed will let the old bonds mature, and not buy new ones. That way the money just disappears and the balance sheet shrinks. The new name for this is “quantitative tightening,” or QT.”
Rickards’, a long standing expert in central bank policy, believes that quantitative tightening will be a major factor in monetary policy over the weeks and months going forward.
He reports skeptically, “The Fed wants to start shrinking its balance sheet by letting the bonds mature, receiving the cash and not reinvesting. That way the balance sheet shrinks and the money just disappears.”
What Happens if Quantitative Tightening Fails?
As of June 2017, Barron’s reported that the Fed funds rate is expected to hit at 2.5%-2.75% by the end of 2018. Expectations from the largest bank in America has signaled that the Fed will look to lower its balance sheet to $2 trillion by 2020.
All of that equates to the Fed needing time in order to gradually digress the quantitative monetary programs.
Unfortunately, time does not appear to be on the side of the Fed this round.
David Stockman, the former White House budget director recently told CNBC, “There is a massive fantasy built in that an economy 93 months into an expansion, almost the longest in history, can suddenly get up on its hind-legs and start growing again.”
As the Fed begins to tighten, that long growth trend could come under siege.
Even the OECD’s recent June 2017 report noted:
“The extent of US fiscal support in 2018 also remains very uncertain, given the challenges being experienced in reaching political agreement about policy choices.”
That all relays a considerable signal that time, uncertainty and economic “clean up” might not be possible, regardless of the Fed’s quantitative tightening ambitions. Time is simply not a luxury the Fed seems to have.
Jim Rickards leaves a final warning that, “The Fed will definitely raise interest rates on June 14 and indicate plans for at least one more rate hike, maybe two, later this year that markets will have to factor in…” Indications, he believes, would be a “double-dose of cold water” to Washington’s current economic ambitions.
