by Stefan Stanford, All News Pipeline:
“How should I play that one, Bert? Play it safe? That’s the way you always told me to play it: safe… play the percentage. Well, here we go: fast and loose. One ball, corner pocket. Yeah, percentage players die broke, too, don’t they, Bert?” – Fast Eddie Felson, The Hustler
QT2 Master Plan
Stopping the excess is always much harder than starting it. But sometimes it must be done. And done all the way. Half measures avail nothing.
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On June 1, 2022, Fed Chair Jay Powell commenced Quantitative Tightening (QT) Part 2. “Brace yourself,” was the advice of JPMorgan Chase CEO, Jamie Dimon. Were his banker cohorts listening?
The master plan for QT2 was for the Fed to reduce its holdings of Treasury notes and mortgage-backed securities by a combined $47.5 billion per month for the first three months (July thru August 2022). Then, by September 2022, the Fed would start reducing its balance sheet by a total amount of $95 billion a month (i.e., $60 billion in Treasuries notes and $35 billion in mortgage-backed securities).
Wells Fargo Investment Institute took the Fed at its word and even projected that its balance sheet could shrink by almost $1.5 trillion by the end of 2023. Taking it down to around $7.5 trillion.
To anyone with a memory that extends back longer than two years, it was obvious that there wasn’t a snowball’s chance in hell the Fed would contract its balance sheet to $7.5 trillion by the end of 2023. At the time, we remarked, “We’ll bet dollars to doughnuts this never happens.”
Our certainty was not based on any special insight about the future. It was merely the recognition that QT1 flamed out early.
Specifically, it took 24 months for the Fed to reduce its balance sheet by $800 billion between October 2017 and September 2019 (in the wake of a $3.5 trillion expansion). That was before QT1 abruptly ended in repo-madness.
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