Quantitative Tightening Explained (and What it Means for Markets) 

Thanks for watching! Use the following link to sign up for Morning Brew's awesome newsletter: morningbrewdaily.com/theplainbagel

QE= Fake it till you make it QT= Ready or not, here's your bill.

I see a re-upload by The Plain Bagel. I re-click like button. I re-watch the video.

Hey everyone, yes this is a reupload! Please check out the community post I put out today: ru-vid.comUgkxVIoju507HTpylVACCocSYMx-fSRFUTG5

There is so much information jam packed in this. I'm finding myself rewinding constantly to catch the impact of what you just said. Excellent video!

Animated examples are very useful, helps to solidify the concepts. One thing that I haven't found on your channel is some kind of guide about free resources. Like, how would you replace your tools from your work by other tools that are more or less cheap or free. Would love to learn. Thank you

Thanks for explaining this! Quantitative easing and tightening have confused me for a while.

This re-upload to try and put a little disclaimer on how QE isn't "technically" printing money is a quibble that's going to be seen as distracting from the central thrust of people saying that QE is essentially money-printing (which it is), even though I doubt that was your intention to begin with.

Always good content! Btw, I like the split colour background, nice effect.

Inflation is crazy. My new paycheck with a 15k raise more feels more like 5k. Cost of living as rose and rent is higher. No one I know can't save for the future or enjoy extra spending/life 😢. What's the point anymore....

Just came here to hear how much of a QT i am

Thanks for sharing your insight, my favourite teacher!

What're the differences between today's and yesterday's videos?

I would look back further at the economic policy of Paul Volcker in the 1970's and 1980's to see meaningful examples of how the monetary policy would positively effect inflation. Those recent Monetary policy changes were intentionally made to dampen markets. As you said too much money is chasing few actual good products. The difference between Powell and Volcker is Volcker caused two massive US recessions and raised interest rates by huge basis point hikes to combat inflation. This is supported by Milton Friedman's teachings that inflation is always a product of monetary policy. If it cost more to speculate on the market than to actually make sound investments. Demand for high risk investments like tech business and retail markets will crash. People will buy what they need and not what they want. Nothing is infinite not even growth it should make sense that the market has to fall at times.

Would you consider updating this video based on the March 2024 fed meeting? This was helpful but updated context would be awesome.

I totally understand now. Thank you for the video

The Fed has been very slow in increasing interest rates by a reasonable small amounts over time. So now they are going to have to INCREASE interest rates by higher amounts as they begin to realize this. The recent .75 increase is indicative of this.

Great explanation!

This is similar to the Open Market Operations (OMO) done by the Reserve Bank Of India (RBI) to control money supply in the Indian Economy. Very nice explanation

Updated video, thanks Richard 😊

This is just a long winded way of saying "increasing the supply of currency increases inflation." Which is already obvious.

Really enjoyed this, thanks.

QT is why Keynesians always leave the party before the bill is due...to avoid being called out for their "ideas"

adding a comment to show my appreciation for the re-posted video

fantastic explanation

It was Money Printing! Seethe! Cope!

Thanks for this!

can't believe this content is free

Qe is basically money printing with extra steps so meme is accurate.

Thank you so much. Respect from Argentina!

QE went on too long resulting in runaway real estate appreciation. The real estate market is so constipated with no supply to meet the demand, given that money for buyers was practically free. We need QT so housing prices will come down by at least 25%. Buyers freak at the thought of 7% interest rates but who remembers 1982? Try 19% interest rates.

“Let me issue and control a nation's money and I care not who writes the laws.”

Unless you need to retire and cash out your stocks now, market drops always just seem like opportunities to buy more stock. It can’t be that simple though. What else do market drops cause?

Some persons have short positions. Thats why they are saying “the end is near” thank you bagel for being objective.

Very well explained

Thanks for the valuable video!

Thank you Richard!

People to invite onto your channel: Jeff Snider; Emil Kalinowski; Joseph Wang; Perry Mehrling; Richard Werner; Hugh Hendry; Alfonso Pecatiello.

I have a question two years later: Have they actually gone through with this QT in america since 2022? What metrics should we watch? Is there some indicator/tracker on trading view that shows FED reserve amount in trillions, or how much it buys/sells every month? And lastly, are they not likely to reverse into another QE, now that the recession is on the horizon? (I mean those bond yields are surely uninverting)

Thanks for the fantastic video. How will we know when quantitative tightening is happening? Will there be a formal announcement?

Hi Richard! I have a question about about the Canadian economy for you. I am a little worried for the Canadian real estate market. The recent rate hikes can put pressure on the mortgage holders since the variable rate holders' payments will go up. Also, the general increase mortgage payments can price into the real estate value and crash the prices. Therefore, the people who bought in late and took out as much as they could while the rate were down would not be able to sell and cover the whole mortgage price in the future. I am most concerned for the Vancouver and Toronto markets. Could this cause a wave of defaults and hurt the banking sector similar to the US in 2008?

In last 10 years tech sector grew exponentially but the non tech sector was lagging, in 2022 we saw tech falling and oil and commodities surging

Thank you very much. Finally, I understand.

the word is 'increase' not 'hike'

I’m confused, this is a reupload right?

Why do you think the market will recover? Recency bias?

this sounds familiar...

Came here to drop a comment after seeing it re-uploaded

Always 🥯 💯

Do you have a video on Reverse Repos ?

We crashing. Normally the Fed would bail investors out by reducing Interest Rates. They don’t an option to do that right now, and so…..

Thanks for the video, very helpful Wondering - the coupons received while these assets are held... do they go against the balance? If so, (in theory) they could have a positive balance if all assets were sold / matured? What then happens to the positive balance? Not sure if this has actually ever happened. Assuming they would keep the 'positive balance' for the next time they need to QE?

"dude... uncool :(" the background music remind me of history oversimplified

Thanks

Banks don't lend from reserves, it's an asset swap so it doesn't cause inflation. So QT does not cause delfation. At most it causes a wealth effect, but it's mostly placebo. Even less discussed is the short term inflationary aspect of interest rate hikes caused by cost push and debt roll over, though It will crush demand at a high enough rate by causing aggregate debt to contract. Monetary policy = trash. Inflation will come down soon as fiscal pull back and high prices crush demand.

Why is there no period of neither inflating nor deflating the balance sheet?

Re-click that like button

It would be really nice to see a follow up video to this now that we've seen a bear market rally in July, a new low for the markets and the crisis' in various other economies like Sri Lanka, China, United Kingdom, etc...

Is this a reupload or did I just dream about this video?

Wasn’t this video already up?

Wasnt this vid already posted?

I prefer to call it Quantitative Teasing

Cash is king

Is it good time to buy bond now? Why or why not? Thanks

yisus that was hard for my small mind

What happens if the securities that the Fed bought during QE then default before and/or at maturity because new interest rates are too high to support a refinance at maturity?

reupload?

when the federal reserve sets interest rates, why can't they simply just remove the money it earns from the interest out of circulation?

In the 1970s are there relationships between inflation and unemployment rate?

Respect!

Stupid question: Does and should the FED pay attentions to the stock market? As far as I understood the FEDs responsibility is the economy and the currency, but somehow it is often implied that the FED is making its decisions according to market reactions.

So they buy real assets with made up money and then sell them for real money?

Thirty-six hours Rolling in pain Praying to someone Free me again Oh, I'll be a good boy Please make me well I promise you anything Get me out of this hell -John Lennon "Cold Turkey"

Economy is economy

New here. Skeptical of anyone claiming knowledge but also open minded.

Richard is a QT.

If QT is unexplainable than why are you explaining it?. Slide to 9:30 time. Are we wasting our time here?

If gov buying gov bonds then money is coming back to gov. How is that money going to the market???

QE has?

deja-vu?

It is not going to happen. In June Powell's Fed put up some mortgage backed securities for sale from its balance sheet. No one stepped up to buy them. Actually, during the month the Fed actually added to its balance sheet. Powell has often said one thing and has done the opposite. Looks like QT is just not going to happen. To what result? Who knows. Interestingly, in Japan the country continues to dump its trove of U.S. Treasuries. No trouble selling low coupon bonds there. Wonder why.

The fact that you didnt talk about the "cantillon effect" makes the vídeo half true. The printing money Will stop some of that.

So basically it’s like Prednisone

Someone, please tell me what QT looks like in T- account FED balance sheet ? Thank you

printing money was not good for people like me only the great players and corporations.

Since sending guns to Ukraine will likely increase inflation due to the money being circulated back into US defense companies, couldn’t the US donate money instead of guns to reduce money supply therefore causing QT while helping Ukraine?

I see that you have re-uploaded this video, modifying your use of vocabulary using the word ‘bank reserve’ instead of ‘money’. My comment on the original version was not one of semantics, once you fully appreciate what this distinction represents you cannot conclude any of the points you made in the video. It’s clear you put a lot of effort into your videos - and I don’t want to disparage you - but this video still spreads a lot of misinformation about QE. I will first try and summarise an explanation of QE, I have left some sources underneath. The theorised mechanisms by which QE is supposed to work don’t hold water; this is because most people (unfortunately even PhD economists) do not fully appreciate the distinction between bank reserves and ‘money’. In very simple terms, QE does not represent the creation of anything (confusing, right?), it also does not “support lending activity”. Fact 1: Virtually all of the money that everyone in the economy (companies, government, people) is credit. Fact 2: Only banks can create credit Fact 3: Credit is created when loans are ‘issued’ - Banks do not lend out ‘existing money’/credit that other accounts ‘deposit’ in the bank Fact 4: Credit is a liability on a bank’s balance sheet (accounts payable) Fact 5: Banks are not restricted in credit creation by the amount of reserves they have, the only limitation they truly have is the strength of their balance sheet and their confidence in the ‘borrower’. *QE Fact 1: QE represents an overnight asset swap (that is continuously repeated) between newly created bank reserves and existing asset backed securities.* - All that occurs is a change in the composition of a bank’s balance sheet (less securities, more reserves). If you look at the Fed’s balance sheet you will see that reserves are listed as a liability and the securities they “purchased” (not a purchase because it is actually only being held there is collateral - they cannot ‘sell’ the security, only exchange it back to the bank) as an asset. Again, net change in a bank’s assets, liabilities or equity = 0. Net change in central bank’s assets = + securities held as collateral Net change in central bank’s liabilities = + new bank reserves Net change in central bank’s equity = 0 Once you truly appreciate this, it becomes very clear that QE does not affect the economy in any appreciable way whatsoever. All of the credit that banks create that go into the economy are completely independent from QE (nothing has changed in their operations). The “portfolio rebalancing” channel that you mention at 1:50 and its inverse at 5:05 is speculative, and based on the theoretical premise of imperfect substitutability. It is further nullified by two realities: Reality 1: The bonds that are purchased by banks to be exchanged for reserves do not introduce any new money into the economy Reality 2: Any marginal increase in demand for bonds is minute and temporary. This is because the market’s demand for bonds adjusts with any price increase, and the absence of off-the-run bonds (those now on the central bank’s balance sheet) has no impact on the market whatsoever (because they are rarely exchanged). The most generous effect you can find in the literature is that a median reduction in yields of 50 basis points for every 10% of GDP on a central bank’s balance sheet. I hope you can now clearly see that quantitative tightening is not reducing liquidity, since quantitative easing never introduced any to begin with. The premise that there will be less money in the economy is completely incompatible with the reality that only banks create money. Same with the yields. Same with inflation. Same with ‘inflated asset prices’ Same with any effect anyone claims QE has ever had. In sum, QE is almost entirely psychological (due to very few people bothering to understand the literature). Sources/FYI: Simple accounting view of QE: Can Banks Spend Their Reserves? - Fed Guy, 2020 Banks create credit: Sheard, P. (2013). Repeat After Me: Banks Cannot And Do Not “Lend Out” Reserves. QE is an asset swap (not money creation): Blake, A., & Rule, G. (2015). Understanding the central bank balance sheet. {page 10} Bank reserves do not affect credit creation: Blake, A., & Rule, G. (2015). Understanding the central bank balance sheet. {page 13} and Carpenter, S. B., & Demiralp, S. (2010). Money, Reserves, and the Transmission of Monetary Policy: Does the Money Multiplier Exist? and Keister, T., & Mcandrews, J. J. (2009). Why Are Banks Holding So Many Excess Reserves? Highest estimate of yield reduction by QE: Gagnon, J. (2016). Quantitative Easing: An Underappreciated Success. {lol at the title}

Have a comment!

Is inflation overstated because the "basket of goods" measured does not change to take into account the average person's strategy to deal with rising prices, for example by substituting cheaper goods or doing without?

So what do they do with sold balance sheet asset?t they bought it with created money anyway

When he says "Buy Assets" he means Bailout for private companies

Hey why did you reupload?

Just my opinion, but this whole sordid affair has shown how badly planning is needed in the markets. We can't rely on "last minute" supply chains for our entire global economy. We need to start assessing needs and producing goods to match them well beforehand, or we'll be forever running to try and catch up against an escalator.

Why’s this posted again lol

hello sir i find your content very intersting, just one thing u speak away away to fasdt think that some of your followers are not a native so please slow down when you speak thx

didn't you make a Quantitative Tightening like 2 days ago? or should check my room for co2 poisoning

What is QT? That's you plain bagle, you're a QT.

this video did not have to be 13 minutes long

The current rise in inflation is almost entirely attributable to Russia's invasion of Ukraine and the subsequent imposition of sanctions. The rise in oil and gas prices is already weakening global demand for goods. Why would the Federal Reserve be tightening to reduce demand for goods even further? Or, is their strategy to reduce prices an effort to punish Russia by reducing the price of oil and gas?

Shes dfntlt a Qt