QT Impact: Deutsche Sees 2+ Hike Equiv; TD Eyes Real Rates (2/2)

Sell-side estimates of the Fed funds rate tightening equivalent of QT vary slightly.

• Deutsche sees $600-650B of asset runoff as equal to about one 25bp rate hike. Their projections thus equate the QT impact to about two and a half 25bp hikes through end-2023. Though they caution there is significant uncertainty around such estimates: "there are a number of different factors this time that could impact the translation of QT into rate hikes, including that the duration of the Fed's portfolio is lower and financial conditions have already tightened considerably with a sharp rise in nominal and real yields."
• While acknowledging Fed officials' estimates of QT being equivalent to 2-3 hikes, TD sees the impact of QT as "non-linear", tightening more via real rates when the funds rate is near or above neutral. They note that in Q4 2018 when the Fed hiked rates to 2.5% (near neutral), 5Y5Y real rates shot higher by ~50bp to 118bp, tightening financial conditions such that the Fed had to signal the end of the tightening cycle.
• TD also notes that the market may already have priced in the "stock effect" of QT starting, but the "flow effect" might become more pronounced as reserves fall and short-term rate hikes bite.