**Quantitative Tightening Could Set Off a Lengthy Tantrum**
**The Federal Reserve may not give in so easily this time to howls of protest from the markets**
**By Justin Lahart, The Wall Street Journal, April 6, 2022**
**Investors don’t know precisely what will happen when the Federal Reserve cuts its massive Treasury and mortgage-backed security holdings. But they know that they don’t like it.**
**In minutes from last month’s rate-setting meeting, released Wednesday, Fed policy makers signaled a plan to start shrinking the central bank’s asset portfolio, a process known as quantitative tightening, as soon as their next gathering in May....**
**When the taper tantrum struck, the Fed was still trying to nurse the U.S. economy back to health while now it is deeply worried that high inflation is becoming ingrained in people’s expectations. This suggests the Fed won’t be so easily pushed off its plans this time. The quantitative-tightening tantrum could go on a lot longer than the taper tantrum did.** [end quote]
The Federal Reserve ballooned its assets after th 2008 financial crisis to suppress interest rates. In 2013 (long after the recession ended), the Fed announced that it would begin to taper its bloated book. The markets had a “taper tantrum.” The 10 year Treasury yield doubled. The markets had a similar hissy fit in 2018 for the same reason.
It was easier for the Fed to back down then because inflation was low. Now that inflation is so high that it’s Americans’ greatest economic concern, the Fed won’t be as likely to cave to the markets’ howls of pain.
The fun has just begun. Look at the 2013 and 2018 “taper tantrum” charts and realize that the Fed will have to move a lot more this time around to begin to make a dent in inflation. Especially since consumer price inflation has much more to do with supply and demand factors that interest rates can’t change readily.