Fed begins quantitative tightening on unprecedented scale - 15 iunie 2022

On Wednesday, the US central bank will stop pumping the proceeds of an initial $15bn of maturing Treasuries back into the $23tn market for US government debt, the first time it has done so since it kicked off its bond-buying programme in the early days of the coronavirus pandemic. 

Members of the Federal Open Market Committee in May officially agreed to cap the run-off at an initial pace of $30bn a month for Treasuries and $17.5bn for agency mortgage-backed securities, before ramping up over three months to a maximum pace of $60bn and $35bn, respectively. That translates to as much as $95bn per month. 

That is a far more aggressive plan than the last balance sheet unwind in 2017-19, which began nearly two years after the Fed lifted interest rates for the first time since the global financial crisis. That move ultimately ended in disaster: overnight lending markets seized up, suggesting the Fed had pulled too much money out of the system. 

Liquidity in the Treasury market in recent weeks has been at its worst levels since March 2020 in the days before the Fed was forced to intervene and buy bonds to ease market functioning, according to a Bloomberg index that measures traders’ ability to execute deals without affecting prices.

https://www.ft.com/content/2496105a-d211-4abe-ab5d-46a91876428f