Fed Quantitative Tightening to Start Today, Big Day of Economic Data to Unfold

We have a big day for economic data today, as long as we’re patient. Pre-market indices are whipsawing higher again to start a new month, but on no real news that we didn’t have yesterday afternoon. The Dow is +195 points at this hour, the S&P 500 is +15 and the Nasdaq is +50.

Yet it won’t be until after the opening bell that we get new Manufacturing data for May (both PMI and ISM), JOLTS numbers for April (including job quits) and Construction Spending, also for April. Further, long-time hawkish Fed President James Bullard speaks this afternoon — it will be interesting to get his take ahead of the June Fed meeting — a new Beige Book comes out, as well as Motor Vehicle Sales sprinkled throughout the day.

This also marks the day that Quantitative Tightening (QT) finally begins: the Fed’s program to drain the $9 trillion currently on its balance sheet, grown so large in big part due to Treasury bills and mortgage-backed securities backstopping the U.S. economy during the Covid era — and some would say well beyond that. Bear in mind we hadn’t paid down the Quantitative Easing (QE) from the Great Recession yet, and we just kept adding from there.

The $30 billion in bond and securities expiration beginning today is expected to double by September. Of course, these sound like big numbers, but the bigger the better if we really want this balance sheet back to a responsible level. At $30 billion per year it would take another quarter-century before the $9 trillion is paid down; at $60 billion, that shortens to sometime next decade.

The Federal Open Market Committee (FOMC), whose next official meeting takes place on June 14th and 15th, has already noted it reserves the right to raise or lower the expiration rate per month, depending how the economy responds to the draw-down. We’ve seen over recent years and decades how difficult sustaining this sort of operation can be in other countries — thinking Japan in particular here — so this is something worth keeping an eye on.

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