Powell: Quantitative tightening from the end of the year… Possibility of about 4 trillion dollars 7 times the financial crisis ‘speed is key’

Fed Chair Powell Comments on a Late Startup than Markets Expected
Market anxiety has subsided somewhat, attention to specific plans
Last year, the Fed’s Board of Directors said the Fed would cut its assets by 20% of GDP.
About $4 trillion need to be cut from the current $8.8 trillion

Fed Chairman Jerome Powell. yunhap news

Federal Reserve Chairman Jerome Powell said the US could begin ‘quantitative austerity’ by the end of this year by selling off central bank assets to recoup money. The market, which had expected the start of the first half of the year as early as possible, is taking a breather. Based on comments made by Fed Director Christopher Waller at the end of last year, when quantitative tightening is complete, the Fed will lose about $4 trillion in assets. This means that market liquidity will decrease. Accordingly, the impact on the global economy is expected to change depending on how the Fed adjusts the pace of quantitative tightening in the future. “The central bank may start curtailing its portfolio of bonds and other assets later this year,” Fed Chairman Powell said at a Senate confirmation hearing on the 11th (local time), according to the WSJ. After the release of the minutes of the December 2021 Federal Open Market Committee (FOMC) regular meeting on the 5th, the start of quantitative tightening is later than the first half predicted by the global financial markets. As a result, all three major indexes including the Dow closed higher in the New York Stock Exchange last night, and the 10-year US Treasury yield fell to 1.74% from the previous day. The domestic market also showed a stable flow on this day, with the won-dollar exchange rate dropping by 4.2 won from the previous day, and the KOSPI rising by 1.5%. The market is interested in the size and duration of quantitative tightening. As a result, the impact on the market may also vary. “It could be faster (this time) than previous experience of downsizing,” Powell said at the hearing. The Fed’s previous quantitative tightening took place between October 2017 and September 2019. During this period, the Fed’s total assets fell by about $600 billion, from $4.5 trillion to $3.9 trillion. The extent of quantitative austerity that the Fed will proceed in the future can be hinted at by Fed Director Waller Waller in December last year. He said that he would “prefer to bring the balance sheet size back from the current 35% of gross domestic product (GDP) to about 20%.” Last year’s nominal GDP figures for the United States have not been finalized, so it’s difficult to know what projection Waller used to estimate the ratio. However, if calculated based on the estimates of the International Monetary Fund (IMF) and securities companies (about $23 trillion), the current Fed assets ($8.8 trillion) are about 38% of the GDP. To reduce this to the level of 20% of gross domestic product ($4.6 trillion), about $4 trillion must be disposed of. This is seven times the size of the previous quantitative tightening ($600 billion). Quantitative tightening refers to the absorption of dollars by selling a portion of government bonds and mortgage-backed securities (MBS) held every month to the market. Do not reinvest maturing bonds. In 2017-2019, the largest monthly sale was $50 billion in quantitative tightening. This time, the market is expected to shrink between $50 billion and $150 billion a month. If the Fed roughly sells $100 billion of bonds per month, it will take three years and four months to reduce its total assets of $4 trillion by simple calculation (fixed based on the 2021 nominal GDP) . Since this is a simple calculation, it is difficult to predict at what scale and at what speed the actual quantitative tightening will take place. Quantitative tightening was also implemented flexibly in size and speed according to market conditions for the past two years. This is why it is important to have a detailed plan for quantitative austerity that the Fed will introduce in the future. Quantitative austerity, depending on its speed and scale, can increase economic unrest or cool overheating. There is, however, a very high chance of raising the market interest rate. A September 2018 Federal Reserve Bank of New York survey found that market investors reported that the 10-year U.S. Treasury yield was pressured to rise by an average of 0.07 to 0.1 percentage points over the first year of quantitative tightening, with an average increase of 0.13 to 0.18 percentage points in the future. He said he could go up. By Jeon Seul-gi, staff reporter [email protected]


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