According to analysts at Alpine Macro, Quantitative Tightening (QT) continues as the Federal Reserve reduces its balance sheet, which has shrunk by $2 trillion since June 2022. This contraction has caused a recent increase in money market rates, leading investors to question potential risks to financial markets.
Alpine Macro acknowledges that memories of the 2019 liquidity crunch have been revived, when QT caused disruptions in money markets, prompting the Fed to inject liquidity back into the system. Despite concerns about a repeat scenario, Alpine Macro believes a liquidity crisis similar to 2019 is unlikely.
Unlike before, Alpine Macro argues that QT in this cycle will not hinder bank lending. They point to early signs of credit growth acceleration, indicating that lending activity may remain robust even with the reduction in the Fed’s balance sheet.
The analysts highlight that consumer, real estate, and C&I loans may increase as interest rates decrease, counteracting any potential liquidity constraints. They believe that the current QT process is structured to prevent market chaos, ensuring minimal disruptions in funding markets and lending to the broader economy.
Alpine Macro concludes that this controlled approach to QT should mitigate recession risks, facilitate a smooth transition, and uphold asset prices. While QT remains a critical factor for market observers, it is not an immediate threat to financial stability. The analysts anticipate continued market support, supported by credit growth and steady economic progress as interest rates eventually decline.