More worries for US stocks, bonds

Fed’s quantitative tightening may make this year more brutal for markets

NEW YORK:

As the Federal Reserve accelerates the unwinding of its balance sheet this month, some investors worry that so-called quantitative tightening may weigh on the economy and make this year even more brutal for stocks and bonds.

After roughly doubling its balance sheet to $9 trillion after the pandemic, the Fed began unloading some of the Treasuries and mortgage-backed securities it holds in June at a pace of $47.5 billion. It has announced that this month it is ramping up the pace of quantitative tightening to $95 billion.

The scale of the Fed’s unwinding is unprecedented and the effects of the central bank ending its role as a consistent, price-insensitive buyer of Treasuries have so far been hard to pinpoint in asset prices.

Some investors, however, are cutting back equities or fixed income as quantitative tightening accelerates, wary that the process could combine with factors such as higher interest rates and a soaring dollar to further weigh on asset prices and hurt growth.

“The economy is already in a glide path to recession and the Fed’s quickening pace in terms of QT will accelerate the decline in stock prices and increase in bond yields,” said Phil Orlando, chief equity market strategist at Federated Hermes, who recently increased his cash allocation to a 20-year high.

The Fed’s tighter monetary policy has weighed on stocks and bonds in 2022. The S&P 500 is down 14.6%, while the yield on the benchmark 10-year US Treasury, which moves inversely to prices, recently stood at 3.30%, after surging 182 basis points this year.

Although recent data have shown the US economy has remained resilient in the face of higher interest rates, many economists believe tighter monetary policy is increasing the chances of a recession next year.

Published in The Express Tribune, September 11^th, 2022.

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