Markets howl at quant. tightening

Investment Analysis Clubs Macro Economic Trends and Risks
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https://www.wsj.com/articles/quantitative-tightening-could-s…

**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]

https://fred.stlouisfed.org/series/WALCL

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.

https://fred.stlouisfed.org/series/DGS10
https://fred.stlouisfed.org/series/SP500

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.

https://money.com/inflation-top-concern-america-poll/

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.

Wendy

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Wendy,

People foolish enough to be paying interest on credit cards will be the first to cut consumption.

While marginal that will take inflation down and down some more.

That in turn will cut wage inflation and in turn disposable income for the top 20%. We might see inflation cut by as much as .5% per month…just throwing a guestimate out there.

As the equity markets descend the wealth effect will be reigned in again cutting consumption.

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People foolish enough to be paying interest on credit cards will be the first to cut consumption.

I’m not sure if 16.9% rising to 17.9% or 18.9% is of much consequence to people paying interest on their credit cards. Average balance is $3700, so the monthly increase is about $6 in additional interest.

Meanwhile people who commute regularly have seen their gasoline bill go up $50-100 a month. That is of much more consequence! And they will probably cut consumption first.

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People foolish enough to be paying interest on credit cards will be the first to cut consumption.

Did I hear a Bronx cheer from the Peanut Gallery*?*
https://theconversation.com/the-complicated-origin-of-the-ex…

At any rate the statement (assertion?) is worthy of a raspberry because
https://en.wikipedia.org/wiki/Blowing_a_raspberry
anyone dumb enough to run up debt at credit/debt card interest rates won’t be smart enough to stop using the cards even now.