13/05/2022
Quantitative Tightening (QT)
Much attention will be given to the Fed's quantitative tightening plan, which it has already put on the agenda at its last meetings, in an environment where the 10-year Tnote is yielding more than 3%.
"We also believe that the quantitative tightening process could be activated as soon as today's meeting. The minutes of the last meeting indicate that quantitative tightening will be capped at $60 billion for Treasury bills and $35 billion dollars for mortgage-backed securities,” the IG strategist adds.
For Ellen Gaske, senior economist at PGIM Fixed Income, there could be “a relatively rapid rise in QT from June,” with the pace of Fed rate hikes slowing by the second half of this year, which should be accompanied by "convincing monthly inflation readings".
If inflation does not show signs of slowing with the tools deployed by the Fed, the "Volcker moment" will not arrive "until the end of this year or the beginning of next year", according to Mr. Gaske. By then, the economist explains, "the Fed will have had more time to assess the effects of the headwinds that are already building up, such as tighter financial conditions, tax reversals, higher energy and food, lagging wages and a slowing global economy".