Monetary Policy & Inflation | US
What Will Quantitative Tightening Look Like in 2022?
- By Dominique Dwor-Frecaut
- 5 min read
Summary
• QT2 could start around mid-year with initial reinvestment caps at $20bn and raised faster and higher than during QT1.
• The Fed decision to not extend the exclusion of reserves from the SLR computation has created an excess reserves supply, driven money market rates through the Fed RRP rate and led to the Fed funding its securities portfolio through the RRP rather than through reserve issuance.
• As the Fed balance sheet shrinks, market rates are likely to rise over the Fed RRP rate, which would see the RRP fall ahead of reserves.
Market Implications
• Negative risk assets, as QT2 signals weaker Fed support to markets.
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