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MNI: Fed QT May Have Deeper Tightening Effect - Ex-Officials

MNI (Washington)

Bond runoffs may not go as smoothly as the Fed anticipates, former officials tell MNI.

The Federal Reserve's unprecedented effort to whittle down a record USD9 trillion balance sheet could have a much larger than expected impact on financial conditions if markets become disorderly, ex-Fed officials told MNI, casting doubt on the chances that the asset reduction plans will run quietly in the background as current policymakers hope.

The Fed's second go at shrinking its balance sheet, which it calculates will be equivalent in impact to just one rate hike a year, is expected by officials to proceed more smoothly than its first attempt in 2018 when key lessons were learned about banking system reserve requirements. But pandemic-era QT is twice as aggressive and comes at a time of rapidly rising yields. If markets turn bumpy, ex-officials fear the tightening effect from the Fed’s bond runoffs could be multiplied several times over.

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The Federal Reserve's unprecedented effort to whittle down a record USD9 trillion balance sheet could have a much larger than expected impact on financial conditions if markets become disorderly, ex-Fed officials told MNI, casting doubt on the chances that the asset reduction plans will run quietly in the background as current policymakers hope.

The Fed's second go at shrinking its balance sheet, which it calculates will be equivalent in impact to just one rate hike a year, is expected by officials to proceed more smoothly than its first attempt in 2018 when key lessons were learned about banking system reserve requirements. But pandemic-era QT is twice as aggressive and comes at a time of rapidly rising yields. If markets turn bumpy, ex-officials fear the tightening effect from the Fed’s bond runoffs could be multiplied several times over.

Keep reading...Show less