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Below is a chart and brief excerpt from today’s Market Situation Report written by Tier 1 Alpha. If you’re interested in learning more about the Hedgeye-Tier 1 Alpha partnership, there’s more information here. |
Quantitative Tightening (QT) was initiated in 2022 with the objective of draining excess reserves from the financial system. However, the extent of liquidity removal thus far has been negligible, and there are indications that the Federal Reserve may announce a tapering of QT operations in the upcoming week.
Despite the Fed's bond holdings decreasing by $1.6 trillion from their peak in mid-2022 due to QT, bank reserves, which represent system liquidity, have remained virtually unchanged. This can be attributed to money market funds effectively neutralizing a significant portion of QT's impact by absorbing a substantial amount of Treasury issuance from Secretary Janet Yellen, thereby preventing the need for private sector banks to do so. Additionally, Yellen has taken steps to mitigate duration risk in the system by disproportionately issuing short-term Treasury bills.
If the Federal Reserve announces a tapering of QT operations, coupled with the Treasury Department utilizing a portion of the current $941 billion balance in the Treasury General Account, it could result in a prolonged period of ample liquidity in financial markets.
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Learn more about the Market Situation Report written by Tier 1 Alpha. |
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