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Economy7 hours ago (Sep 09, 2022 09 30pm EST)
© Reuters. The Union Jack flies in front of half the employees as commuters walk down Wall Street in the morning outside the New York Stock Exchange (NYSE) in New York City, U.S., September 9, 2022. REUTERS/Brendan McDermid 
David Randall
NEW YORK (Reuters) – As the Federal Reserve accelerates its balance sheet reduction this month, some investors are concerned about the so-called Quantitative tightening in the U.S. could weigh on the economy and make this year even more brutal for stocks and bonds. It held at a pace of $47.5 billion in June. The Federal Reserve announced that it will accelerate the pace of quantitative tightening to $95 billion this month. As a consistent, price-insensitive buyer of Treasuries, asset prices have been difficult to pin down so far.
However, with quantitative tightening, some investors are cutting equities or accelerating fixed income, fearing that the process could be combined with factors such as higher interest rates and a surging dollar, Further weigh on asset prices and hurt growth.
“The economy is already in decline,” said Phil Orlando, chief equity market strategist at Federated Hermes (NYSE: ), who recently increased his cash allocation to a 20-year high.
Fed tightening monetary policy weighs on stocks and bonds, down 14.6% in 2022, while the yield on the benchmark 10-year U.S. Treasury note, which is inversely related to price, recently reached 182 basis points after surging 182 basis points this year. 3.30%.
Despite recent data showing that the U.S. economy remains resilient despite rising interest rates, many economists believe that monetary tightening is increasing the likelihood of a recession next year. Possibility.
The New York Fed forecast in May that the Fed will reduce its holdings by $2.5 trillion by 2025.
This How it will affect the economy: Federated Hermes’ Orlando says that every $1 trillion in reductions in the Fed’s balance sheet equates to a 25 basis point implicit rate hike. Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets, estimates that by the end of 2023 alone, It could add up to as much as 75 basis points.
On the other hand, Solomon Tadesse, head of quantitative strategy for North America at Societe Generale (OTC: ), thinks the Fed will eventually get out of its balance sheet The $3.9 trillion cut in the table equates to an implicit rate hike of about 450 basis points. The Fed has already raised rates by 225 basis points and is expected to add another 75 basis points later this month.
“A rise in QT could trigger the next drop in the market,” wrote Tadesse, who thinks the S&P could fall into the 2900-3200 range.
Next week investors will focus on consumer price data for August for signs that inflation has peaked. The Federal Reserve will hold its monetary policy meeting on Sept. 21.
Harbor Capital Jake Schulmeier, portfolio manager at Advisors, said the tightening of financial conditions has made it more difficult to reduce liquidity
“It makes us pause before we do anything a bit,” he said. While Schurmeier sees longer-dated U.S. Treasuries as attractive, he “is reluctant to add more risk until volatility subsides,” he said.
Timothy Braude, global head of OCIO, an asset manager at Goldman Sachs (NYSE: ), has been reducing his equity allocation in anticipation of the Fed’s quantitative tightening large volatility.
“It’s hard to say which markets will be affected the most,” he said.
True, some investors doubt that quantitative tightening will have a huge impact on the market.
“The pace of QT has been known since the Fed announced its QT program in May,” strategists at UBS Global Wealth Management wrote on Thursday. “However, when combined with a hawkish Fed, market sentiment remains focused on picking up the pace, although the long-term impact on the market is not significant.”
U.S. Energy Crisis DWS The pace and duration of rate hikes in Europe, the Federal Reserve, and a potential recession in the U.S. could trump quantitative tightening as market drivers, said David Bianco, chief investment officer for the Americas at Group.
“We’re not ignoring the risks of QT, but they pale in comparison to the risks of the Fed raising overnight rates and how long they have to stay there,” he said.
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