Investing.com — In a note to clients this week, analysts at Alpine Macro assessed quantitative tightening (QT), noting that it will continue as the Federal Reserve shrinks its balance sheet, which has already shrunk by $2 trillion since June 2022.
The company says the contraction has led to a recent spike in money market rates, raising questions among investors about the potential risks to financial markets.
Alpine said the rapid decline in the Fed’s balance sheet has revived memories of the 2019 liquidity crisis, when QT contributed to severe disruptions in money markets, ultimately forcing the Fed to halt its tightening efforts and inject liquidity back into the system to inject.
With QT still ongoing, some are concerned about a similar outcome. However, Alpine Macro believes that a repeat of the 2019 liquidity crisis is “highly unlikely”.
Unlike the previous episode, Alpine Macro argues that QT “will not be a constraint on bank lending” in this cycle.
The analysts point to early indicators of accelerating credit growth, suggesting lending activity could remain resilient even with the Fed’s balance sheet reduction.
In fact, they highlight that “consumer, real estate and C&I lending could all accelerate as interest rates fall,” offsetting any tightening effects on liquidity.
The analysts believe that the current QT process is structured to avoid market chaos, noting that both the “funding markets and lending to the broader economy” are unlikely to experience significant disruptions.
They conclude that this controlled approach to QT “should limit recession risks, aid a soft landing and support asset prices.”
According to Alpine Macro, while QT is a crucial factor for market observers, it does not pose an immediate threat to financial stability. Instead, they foresee a continued trajectory toward market support, supported by credit growth and steady economic momentum as interest rates eventually decline.
