We all know the Fed has been on a path of interest rate hikes since December 2015 when the famous “liftoff” occurred — the first Fed rate hike since 2006 and the first time rates had been above zero since 2008. Since then, the Fed has raised rates six additional times, most recently 10 days ago, and the fed funds target rate is now 2%. But the Fed is doing much more than that.
They are also burning money. They’re doing this by not rolling over maturing Treasury and mortgage securities they hold on their balance sheet. When a security held by the Fed matures and the issuer pays it off, the money sent to the Fed just disappears. This is the opposite of money printing, or QE. It’s called quantitative tightening, or QT.
Far from printing money, the Fed is destroying base money (M0) at a rapid pace. When the Fed started QT in late 2017, they urged market participants to ignore it. They said the QT plan was on autopilot, the Fed was not going to use it as an instrument of policy and the money burning would “run on background” just like a computer program that’s open but not in use at the moment. It’s fine for the Fed to say that, but markets have another view.
Analysts estimate that QT is the equivalent of two–four rate hikes per year over and above the explicit rate hikes. And expected results are beginning to show up in the markets. According to this article, mortgage interest rates are up, mortgage refis are sinking like a stone and housing affordability is suffering. This will eventually result in fewer new home purchases, slower household formation and a weakening economy.
The Fed will have to reverse course and cut rates, or at least “pause” in raising rates much sooner than they think.
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