What the Fed's Big Balance Sheet Unwind Means for Markets

Odd Lots

Bloomberg

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4.4 • 1.6K Ratings

🗓️ 25 July 2022

⏱️ 51 minutes

🔗️ Recording | iTunes | RSS

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Summary

The Federal Reserve recently began shrinking its massive balance sheet, unwinding trillions of dollars worth of bond purchases that it started making during the depths effort to offset the effects of the Covid-19 pandemic. It's not the first time that the Fed has undertaken 'quantitative tightening,' as the process is called. But this time around is different. The central bank is withdrawing stimulus at an unprecedented speed. The big question for markets now is what the impact of this liquidity withdrawal will actually be, and whether differences in the size and composition of the Fed's more recent market operations make this bout of 'QT' different to previous episodes. Joseph Wang is a former trader on the Federal Reserve's open markets desk and now blogs about the central bank as "Fed Guy." In this episode, he walks us through the mechanics of the central bank's big balance sheet unwind, explains how it might affect markets, and outlines all the uncertainties that still surround this huge operation.

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0:00.0	As of 9-1-20-23, you may earn a 5.5% annualized yield with six-month T-bills of held to maturity.
0:06.4	But who's got time to purchase U.S. Treasuries? Doesn't that involve going to a bank?
0:10.0	Or navigating a government website that looks like it was designed in 1996?
0:13.6	Turns out you can go to public.com, purchase Treasury Bills in seconds,
0:17.5	and you may be able to earn some of the highest yields we've seen since the year 2000.
0:21.2	Visit public.com-slash-t-build-podcast to get started.
0:24.9	This is a paid endorsement by public.com.
0:27.2	Fees and conditions apply. Treasury accounts at public.com or through Gico Securities Inc.
0:31.5	Member Finra and SIPC. Not FDIC-insured? No bank guarantee.
0:35.2	May lose value. Full disclosures can be found at www.public.com-slash-t-build-podcast.
0:57.4	Hello and welcome to another episode of The All Thoughts Podcast. I'm Tracy Alloway.
1:25.6	And I'm Joe Wyzenthal. What was the biggest thing that happened in
1:30.1	markets in recent months over the summer? It's like a test. I think it's like a test of,
1:36.3	you know, what people are looking at at the moment, what they find interesting.
1:40.3	I mean, the Fed tightening, obviously. Yes, this is the correct answer.
1:46.5	Okay, I'll stop there. I got it right. So I'm just going to stop there and you can go on.
1:52.0	Okay. So the Fed started quantitative tightening. We're recording this in late June.
1:57.9	And weirdly, it kind of went by without that much fanfare. Like, there were a few news articles
2:04.3	about the Fed firing the starting gun on quantitative tightening and the unwind of its very,
2:10.5	very large balance sheet. But there was so much going on at the same time. You know,
2:14.8	there was that surprise 75 basis point interest rate hike and then lots of talk about inflation
2:19.9	and things like that that it feels like it didn't get as much attention as it probably should have.
	...

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