"'Hawkish' Jackson Hole Followed by 'Quantitative Tightening' Shock... Double Speed from September"

[Asia Economy New York=Special Correspondent Joselgina] "It does not matter by how many percentage points the interest rate is raised in September. Remember that Quantitative Tightening (QT) will double to $95 billion per month starting September 1."

This warning was issued by the head of Three-Kumar Global Strategy, a U.S. macroeconomic consulting firm, drawing a line against the so-called 'pace adjustment theory of tightening' ahead of this month's Jackson Hole meeting. Following Federal Reserve (Fed) Chairman Jerome Powell's 'hawkish (monetary tightening preference)' speech at Jackson Hole last week, the aftershocks continued on the 29th (local time), and the market is now facing the shock of QT.

◇QT Scale Doubles from September

The U.S. central bank, the Fed, will expand the monthly reduction limits for Treasury bonds and mortgage-backed securities (MBS) to $60 billion and $35 billion respectively, totaling $95 billion starting in September. This is part of QT aimed at quickly withdrawing liquidity from the market by reducing the size of bonds held by the central bank.

In particular, the Fed's balance sheet reduction amount next month will double compared to $47.5 billion from June to August (monthly $30 billion in Treasury bonds and $17.5 billion in MBS). Considering that the monthly cap during the Fed's balance sheet reduction from 2017 to 2019 was up to $50 billion, QT is accelerating at nearly twice the speed compared to that period.

The Fed, which entered an interest rate hike cycle in March this year, began QT on June 1, but the reduction amount over the past three months was minimal. As of the 23rd of this month, the balance sheet size was $8.8697 trillion, showing little change from $8.91 trillion at the end of May. Looking in detail, Treasury holdings decreased, but due to technical factors, MBS holdings actually increased.

Bloomberg reported, "The Fed's balance sheet reduction trend will strengthen from this week," adding, "It will record the largest asset reduction on the portfolio by September 2023." TD Securities strategist Jennady Goldberg evaluated, "QT has officially widened its pace."

◇"Difficult to Even Estimate Impact" Heightened Tightening Concerns

Concerns about tightening are rising further in the financial market. With the Fed's interest rate hikes continuing for several months and the balance sheet reduction amount doubling, there are worries that market liquidity could shrink rapidly. There are also forecasts that instability in the funding market will increase as borrowing costs soar.

Jamie Dimon, CEO of JP Morgan Chase, known as the 'Emperor of Wall Street,' cited 'unprecedented large-scale QT' as one of the reasons why "a hurricane will hit the U.S. economy." Experts agree that due to different economic conditions such as inflation compared to the past, it is difficult to even estimate the impact of this QT.

Moreover, the Fed has left open the possibility of a third consecutive giant step (0.75 percentage point hike) in September. According to the Chicago Mercantile Exchange (CME) FedWatch, the federal funds (FF) futures market currently reflects over a 70% chance that the Fed will raise rates by 0.75 percentage points at the September meeting. The Fed's tightening of money supply alongside rate hikes is inevitably a direct blow to the overall U.S. economy, which many analysts say has already entered a 'technical recession.'

Some predict that as a result, the Fed's QT may not proceed as planned. Former Governor of the Reserve Bank of India, Raghuram Rajan, forecasted, "The Fed may stop QT and resume liquidity supply as it did in September 2019 and March 2020."

On this day as well, aftershocks from Chairman Powell's hawkish speech continued in the market. The Dow Jones Industrial Average, which fell more than 1,000 points on the 26th, continued its downward trend on Monday. In the New York bond market, the 2-year Treasury yield, sensitive to monetary policy, hit its highest level in 15 years since November 2007.

Despite the market shock, there were no comments from Fed officials to soothe the situation. Neel Kashkari, president of the Minneapolis Federal Reserve Bank, known as a dove, said, "I am pleased that (Chairman Powell's remarks) are reflected in the stock market," adding, "People are finally beginning to understand the Fed's sincerity in achieving its (inflation) target."

Meanwhile, the dollar index, which reflects the value of the dollar against the currencies of six major countries, once surged to 109.476, the highest in 20 years since 2002, but later closed slightly lower as expectations for a large rate hike by the European Central Bank (ECB) were factored in.

This content was produced with the assistance of AI translation services.