Quantitative Tightening coming sooner, faster, and bigger, according to the Fed’s minutes today.
By Wolf Richter for WOLF STREET.
Markets were blissfully asleep late last year, and particularly in December, when the Fed became hawkish and made clear that it would move much faster than previously expected, and that there would be more rate hikes sooner, and that the balance sheet runoff – Quantitative Tightening – was already being discussed. And Powell came out after the FOMC meeting on December 15 and said that inflation was now a “big threat.”
And I came out and said at the time that this most reckless Fed ever – still repressing interest rates to near 0% and still printing money hand over fist, though at a slower rate – was “starting to get serious” about inflation. Upon which the markets laughed.
And today, we got the minutes from that meeting, and suddenly it sank in for the markets that the Fed, after brushing off inflation for a year, is getting serious about inflation.
The terms “elevated levels of inflation,” “elevated inflation,” and “elevated inflation pressures” were mentioned five times in the minutes.
Liftoff in March? Then quantitative tightening.
Raising the federal funds rate could come “relatively soon” – so liftoff maybe at the March meeting – and then the balance sheet reduction could come “relatively soon after beginning to raise the federal funds rate,” the minutes said, and it may raise the federal funds rate “sooner or at a faster pace than participants had earlier anticipated.”
Quantitative Tightening: sooner, faster, and more.
The word balance sheet “runoff” occurred 10 times in the minutes. This is the Fed’s term for “Quantitative Tightening,” or QT, which is the opposite of QE and means that the Fed’s balance sheet would shrink by allowing securities to mature without replacement.
“It could be appropriate to begin to reduce the size of the Federal Reserve’s balance sheet relatively soon after beginning to raise the federal funds rate.”
And there was lots of hawkish lingo about the speed and magnitude of the reduction of the balance sheet, repeated several times to make sure everyone got it. Note the importance of the Standing Repo Facilities [SRF] that were announced last July:
- “The appropriate timing of balance sheet runoff would likely be closer to that of policy rate liftoff.”
- “The appropriate pace of balance sheet runoff would likely be faster than” previously (back then, the cap was $50 billion a month)
- “The SRF would help ensure interest rate control as the size of the balance sheet approached its longer-run level
- The SRF could facilitate a faster runoff of the balance sheet than might otherwise be the case
- The SRF could reduce the demand for reserves in the longer run, suggesting that the longer-run balance sheet could be smaller than otherwise.”
Ironically, this – that the SRFs would be a tool to reduce the balance sheet further without blowing stuff up – was what I suspected when the Fed announced the SRFs. So I wrote last July:
“But this looks to me like an effort to get back to a situation where not every run-of-the mill crisis triggers more knee-jerk QE, one bout bigger than the previous one. And it looks to me like some form of preparation to make “balance sheet normalization” work out better next time than last time, which ended in the repo market blowout.”
Fewer hikes of short-term rates; faster bigger QT for higher long-term rates.
The minutes pointed out that the Fed’s strategy might shift to “relying” more on QT and raise short-term rates more moderately. QT would bring up long-term interest rates, thereby ensuring a steeper yield curve.
Long-term interest rates have a much bigger impact on the economy and markets, than short-term interest rates, and this includes the housing market that would face higher mortgage rates.
Good lordy, markets made a mess of things when this came out.
The S&P 500 plunged 1.9%. The Nasdaq plunged 3.3%:
- Apple [AAPL] -2.7%
- Meta [FB] -3.7%
- Alphabet [GOOG] -4.7%
- Amazon [AMZN] -1.9%
- Microsoft [MSFT] -3.8%
- Tesla [TSLA] -5.3%.
Among the small fry: Two ETFs that track some of the craziest stocks out there got crushed today, after having already been crushed and re-crushed since February:
- ARK Innovation ETF [ARKK] plunged 7.1% today, is down 46% from its peak last February, and is 33% in the hole for the 12-month period.
- Renaissance IPO ETF [IPO], which tracks stocks that went public over the past two years, plunged 5.2% today, is down 32% from its peak in February last year, and is 17.8% in the hole for the 12-month period.
The old meme stocks got taken out the back and beaten up:
- GameStop [GME] plunged 13.1% today, to a still ridiculous $129.37, which is down 22.6% for the past month, and down 73% from its peak last year.
- AMC plunged 10.7% today, to a still ridiculous $22.75 a share, is down 21% for the past month, and is down 69% from its peak last June.
Rivian [RIVN] plunged 11.2% today, not only because of the hawkish Fed, but also because Fiat Chrysler announced today that Amazon – which ordered 200,000 e-vans from Rivian – ordered a “significant number” of e-vans from Fiat Chrysler. The stock is down 50% from its high.
Wayfare [W], the internet furniture retailer, plunged 8.6% and is down 30% for the 12-month period and 53% from its intraday high. At $170.26 today, shares are back where they’d first been in March 2019.
It was really ugly for a lot of the stocks that had already been roughed up over the past few months, and there are lot of them out there.
The 10-year yield rose to 1.71% today, having jumped 19 basis points over the three trading days so far this year. Seems, the bond market woke up a little sooner than the stock market.
Cryptos, the new inflation hedge, failed to hedge against anything.
At first, years ago, cryptos were supposed to be this new currency that would leave the hated “fiat” currencies in the dust. And then, when that didn’t pan out, they were supposed to be assets whose prices would endlessly boom. And when that didn’t work out in 2021, they were supposed to be a hedge against inflation.
Well, OK, it started out with Bitcoin, and now there are nearly 9,000 of these cryptos, and it turns out they’re just gambling tokens. For example, the largest hedge against inflation, Bitcoin, has plunged by 36% in the two months since November 7, to hedge again 7% inflation over a 12-month period or whatever. So that didn’t work out either. Well, OK, the jury is still out, I can already hear it, it’s going to a gazillion by March.
But if the Fed – at the core of the hated fiat dollar – is tightening, and if cryptos are supposed to be the force that is independent and outside of the hated fiat, why did cryptos plunge today when QT is showing up on the near horizon? People running for the exists suddenly? Another crypto narrative gone down the drain. In the end, they’re just gambling tokens with which people are trying to get rich quick. And it works for those that can get out in time.
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