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digital daily: QT <Insert Yawn Here>

QT <Insert Yawn Here>. The Fed is embarking on a known path of balance sheet normalization. It generates more excitement than it deserves. An unpredictable and rapid contraction in the balance sheet would be news, mirroring the urgency of its expansion during the pandemic. But quantitative tightening (QT) isn’t that. The signaling tied to the period of quantitative easing (QE) was a line in the sand for risk assets. Deflation was not a risk worth taking. Today, the balance sheet tightening is more for internal consistency. Fed guidance calls for assets to decline around $95 billion a month, starting more gradually in Jun to Aug just to make sure there are no hiccups (here). How big is $95 billion a month? Everyone wants an interest-rate equivalent, so the Fed staffers produced one. The $1,140 billion annualized pace of balance sheet reduction is the equivalent of less than 25 basis points of rate hikes (here). Yawn. We can look back to the 2017 to 2019 period of QT as a case study. Inflation nor its expectations were a problem back then. 10-year breakeven inflation rates started the tightening phase at 1.8% and ended at 1.6%. Inflation expectations fell in the face of declining real yields and a declining unemployment rate to a cycle low of 3.5%. It was policy nirvana. US equity markets rose nearly 20% over the period of QT, though with a wide 25% trading range. A volatility surge in Feb 2018, trade tariffs into the Fall of 2018, and fixed income repo strains in Sep 2019 were all material equity setbacks; they were also brief. Corporate credit remained firm throughout, with commercial and industrial loans marching higher by 13%. Digital assets were equally unphased by the so-called tightening in liquidity conditions. The One River Digital Size Tilt Index (ORDST) advanced 55% over that period, including an unprecedented speculative surge in late 2017 of nearly 4-times, which violently retraced in 2018. This time around into QT now, long-term holders of digital assets are on the rise. The percentage of bitcoin ownership longer than a year is 65.5%, a historical high. How can QE be so important, and QT be so irrelevant? It is all about intent and signal. Policy is making it clear that interest rates are the tool to lean against inflation and speculative excess, not the balance sheet. QT is measured, predictable, and a footnote. There’s a lot to worry about in the world – QT isn’t high on the list.

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