Unprecedented is an overused word in financial markets — but this time it’s justified.
Since the global financial crash, central banks have engaged in a global economic support operation like no other, with the world’s three key organization’s gorging on $15 trillion dollars of bond buying to save financial markets from themselves and prevent a recession that might have been … well, unprecedented!
As of this week’s Federal Reserve meeting, we are now witnessing an unprecedented unwinding of those purchases. Fed Chair Janet Yellen says the U.S. central bank will liquidate $10 billion of the bonds on its $4.5 trillion balance sheet every month. The Fed chair believes the U.S. economy is strong enough to take it, and markets are robust enough to withstand the modest implicit tightening of monetary conditions, even as inflation is still short of the Fed’s target.
The Fed has been preparing the markets for this move for months, in the hope that a gradual shift from quantitative easing (QE) to quantitative tightening (QT) will barely cause a ripple in the monetary pond. But not everyone is convinced that the consequences of this move are obvious or predictable.
Back in July, JPMorgan CEO Jamie Dimon warned of potential disruption saying: “We act like we know exactly how it’s going to happen and we don’t.” In other words, QT is a “known unknown” — there’s