Connect with us

Economics

What Is Quantitative Tightening? How Does It Work?

What Is Quantitative Tightening?The main job of a central bank, like the Federal Reserve, is to keep the economy strong through maximum employment and…

Published

on

Quantitative tightening is not the opposite of quantitative easing—they are distinctly different activities.

Ballun from Getty Images Signature; Canva

What Is Quantitative Tightening?

The main job of a central bank, like the Federal Reserve, is to keep the economy strong through maximum employment and stable prices. It does this by managing the Fed Funds Rate, which it sets at its Federal Open Market Committee meetings. This effectively raises or lowers the interest rates that banks offer companies and consumers for things like mortgages, student loans, and credit cards.

But when the economy needs help and interest rates are already low, the Fed must turn to other tools in its arsenal. This includes practices like quantitative easing and quantitative tightening; the former expands the shares of Treasury bonds, mortgage-backed securities, and even stocks on the government’s balance sheets, while the latter tightens the monetary supply. Both have a profound effect on liquidity in the financial markets.

The Fed came to the rescue with trillions of dollar’s worth of quantitative easing at the end of the 2007–2008 Financial Crisis, and again during the global Coronavirus pandemic.

But the Fed can’t go on printing money forever. Whenever it employs quantitative easing, the Fed must eventually turn to its counterpart, which is known as quantitative tightening, in order to limit some of the negative outcomes of the former, such as inflation.

How Does Quantitative Tightening Work? What Is an Example of Quantitative Tightening?

Through quantitative tightening, the Federal Reserve reduces its supply of monetary reserves in order to tighten its balance sheet—and it does so simply by letting the bonds and other securities it has purchased reach maturity. When this happens, the Treasury department removes them from its cash balances, and thus the money it has “created” effectively disappears.

Does the Fed know exactly when to ease the gas pedal on quantitative easing? According to the Fed, timing is everything. Remember how the Fed’s main job is to create a strong economy through stable prices and high employment? As it carefully monitors the effects interest rates are having on the economy, it also keeps a close eye on the overall measure of inflation. It’s both a constant battle and a juggle. 

Take the period following the Financial Crisis as an example. The 2007–2008 crisis stemmed in large part from the implosion of collateralized debt obligations, and so the Fed kept the Fed Funds Rate at virtually 0% for almost a decade in order to spur growth and maintain stable rates of employment.

During this period, it also undertook a series of quantitative easing measures, watching its balance sheet balloon from $870 billion in August 2007 to $4.5 trillion in September 2017.

The FRED graph below illustrates how the Fed Funds rate, in blue, remained at nearly zero for the period while the total size of the Fed’s balance sheet, in red, grew. The shaded areas indicate recession.

Federal Reserve Bank of New York, Effective Federal Funds Rate [EFFR], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/EFFR, May 16, 2022.

The Fed believed that as soon as employment became stable, it needed to turn its attention to meeting its 2% inflation target, which it accomplished by raising interest rates. And so, in October 2015, it began gradually increasing the Fed Funds Rate in 25 basis point increments. Over the next several years, rates went up from 0.0%–0.25% levels to 2.25%–2.5% in 2018. This course of action, in the Fed’s words, was known as liftoff.

After raising rates a few times with no disastrous consequences, in 2017 the Fed next embarked on an effort to reduce its balance sheet through quantitative tightening. This was also known as unwinding its balance sheet, because it was taking action in a slow and gradual way.

Between 2017 and 2019, the Fed let about $6 billion of Treasury securities mature and $4 billion of mortgage-backed securities “run off” per month, increasing that amount every quarter until it hit a maximum of $30 billion Treasuries and $20 billion mortgage-backed securities per month. By July 2019, the Fed announced that its unwinding was complete.

The Fed published a blog post detailing these efforts, categorizing them as its “balance sheet normalization program,” since it sought to “return the policy rate to more neutral levels.”

What Effect Does Quantitative Tightening Have on the Economy?

While the goal of quantitative easing is to spur growth, quantitative tightening doesn’t hinder it; in fact, many Governors of the Federal Reserve believe quantitative tightening doesn’t have much effect on the economy at all.

“Quantitative tightening does not have equal and opposite effects from quantitative easing,” said St. Louis Fed President Jim Bullard, “Indeed, one may view the effects of unwinding the balance sheet as relatively minor.”

Former Fed Chair Janet Yellen famously described quantitative tightening as “something that will just run quietly in the background over a number of years,” and that “it’ll be like watching paint dry.”

St. Louis Fed Research Director Chris Waller compared quantitative tightening with “slowly opening the stopper in a drain and letting the water run out,” and by doing so, they were “letting the supply of U.S. Treasuries in the hands of the private sector grow.”

But critics have argued that the excess reserves the Fed creates by “printing money” through quantitative easing have negative consequences on the overall economy. For example, these reserves can lead to currency devaluation and higher inflation, which is defined as when prices rise faster than wages. Inflation can have disastrous effects on an economy, resulting in asset bubbles and even recessions.

Even the Fed admitted as much when St. Louis Vice President Chris Neely noted that between 2008–13, the Fed’s asset purchases led to a decrease in 10-Year Treasury yields by 100–200 basis points. He said, “this reduction modestly raised prices and real activity.”

Just remember that the Fed’s principal aims are to generate stable prices and high employment. So while the Fed hasn’t explicitly said so, reducing its balance sheet might be one of its methods to combat inflation.

Why Is Quantitative Tightening on the Fed’s Agenda Again?

In 2022, inflation reached decades’ high, stemming from a number of factors, including fallout from the global Coronavirus pandemic, which increased labor prices, and Russia’s invasion of Ukraine, which affected energy and commodities. In March, 2020, the Fed slashed the Fed Funds rate to 0.00%–0.25% in response to the pandemic. In May, 2022 it raised rates again by 0.5%.

What Is the Schedule for Quantitative Tightening?

On May 4, 2022, the Fed announced it would be undertaking a “phased approach” of quantitative tightening measures beginning with a 3-month period of unwinding $30 billion of Treasuries and $17.5 billion mortgage-backed securities beginning on June 1, 2022. By September, 2022 these caps would increase to $60 billion and $35 billion, respectively.

Is Quantitative Tightening Really So Frightening?

TheStreet’s Ellen Chang says that, according to economists, inflation is on a downward trend, most likely to decline to 3% by the end of the year, and that higher interest rates as well as quantitative tightening should do what they’re supposed to, and reduce pricing pressure. 

Read More

Continue Reading

Economics

The One Housing Chart That Shows A ‘Buyer’s Market’ Has Returned

The One Housing Chart That Shows A ‘Buyer’s Market’ Has Returned

The red hot pandemic-era housing market is cooling as historically tight…

Published

on

The One Housing Chart That Shows A 'Buyer's Market' Has Returned

The red hot pandemic-era housing market is cooling as historically tight available inventory shows signs of reversing. 

An affordability crisis has removed millions of new home buyers as the number of active US listings soared 18.7% in June from a year earlier, the most significant increase in Realtor.com's data going back to 2017, according to Bloomberg. The days of insane bidding wars, waiving home inspections, and putting in an offer 20% or more over the list price appear to be over. In other words, a buyer's market could be emerging. 

"While we anticipate that more inventory will eventually cool the feverish pace of competition, the typical buyer has yet to see meaningful relief from quick-selling homes and record-high asking prices," said Danielle Hale, chief economist for Realtor.com. 

Austin, Texas; Phoenix, Arizona; and Raleigh, North Carolina saw active listings more than double from a year ago. Nashville, Tennessee, active listings jumped 86%, and 72% in the Riverside, California. 

The Federal Reserve's most aggressive tightening campaign sent the 30-year fixed-loan mortgage rate from 3% to over 6% this year (back in March, we warned coming rate explosion would trigger a housing affordability crisis), removing millions of new home buyers who can't afford the cost of homeownership as the median existing-home sales price was around $407k in May. 

Even though inventory is historically tight, supply is expected to increase in markets across the country as demand for loan applications among prospective buyers slumps. Fewer buyers equal more inventory. 

The takeaway is that inventory is rising as homes stay on the market longer because demand evaporated thanks to the housing affordability crisis -- this could mean a housing top is nearing. 

Tyler Durden Thu, 06/30/2022 - 18:50

Read More

Continue Reading

Economics

States Need To Avoid ‘Cures’ That Can Make Inflation Worse

States Need To Avoid ‘Cures’ That Can Make Inflation Worse

Authored by Regina M. Egea and Danielle Zanzalari via RealClearPolicy.com,

Across…

Published

on

States Need To Avoid 'Cures' That Can Make Inflation Worse

Authored by Regina M. Egea and Danielle Zanzalari via RealClearPolicy.com,

Across the United States, state governments are awash in cash. In a sharp contrast, American taxpayers are enduring a rate of inflation unseen in four decades, with the costs of everything from food to gasoline at record highs.

In our home state of New Jersey, Trenton is looking at an unprecedented surplus of $8 billion through a combination of increased tax revenue, federal pandemic aid and borrowing.

A natural impulse among residents and policymakers is to offer residents “relief” in the form of rebate checks.

The reality is that relying exclusively on rebates or direct cash transfers to individuals will only lead to more inflation as this puts more money in consumers’ hands exacerbating the same problem as today - too many dollars chasing too few goods.

Rather, it is prudent that states focus on long-term investment and responsible budgeting to ensure economic growth now and in the future. This is especially important in high tax, big spending states due to the greater flexibility in work arrangements that have exposed the reality that wealth is mobile.

With more residents fleeing high tax states to low tax states, states will need to reevaluate their tax and regulatory climate to stay competitive. 

Regulation can raise the costs for consumers and slow job growth. A series of studies shows the regulation raises prices and worsens poverty.

Working with local governments to revisit restrictive laws that contribute to higher housing prices, such as building height restrictions and zoning rules, as well as removing unnecessary restrictions on business operations will lead to more economic growth.

Another way states can aid productivity and long-term economic growth with their temporary budget surplus, is to fund training programs for middle-skilled jobs.

Nearly every industry has experienced labor shortages and that reality is especially acute in trades like auto, refrigeration, HVAC, electrical, welding, and manufacturing.

States can invest in these skills through high school and vocational school programs. With college borrowing costs astronomically high, this encourages individuals to pursue careers that are lucrative and budget friendly, as well as fill the over 75,000 job openings that our state of New Jersey is projected to need in just a few years.

To further long-term economic growth many states should also concentrate on fixing their unfunded pension liabilities for public employees. This impacts red and blue states alike, with massive liabilities in California ($1.53 trillion), Illinois ($533.72 billion), Texas ($529.70 billion), New York ($508.70 billion) and Ohio ($429.53 billion). Here in New Jersey, our liability is nearly $40,000 for every resident of the state, which can dramatically deter future growth. Beyond using some of states’ budget surplus to shore up pension liabilities, states should move public employees to defined contribution plans, which are used by more than 100 million Americans. These are found to have better investment returns than state-wide pension plans and cost taxpayers less.

Our final recommendation is perhaps our most important: Save for a rainy day. If the U.S. economy enters into a recession, this will mean fewer jobs and less tax revenue for states. To prepare for the future when states again face a budget shortfall, which may be sooner than we think, states should follow best practices of reserving 10% of their budget in a rainy day fund, to sustain essential programs should a downturn occur in the future.

As state leaders consider their budgets, they should focus on long-term economic growth initiatives. Proposals like funding middle-skilled job trainings ensure workers are ready for the next decade, whereas eliminating unnecessary regulations and focusing on pro-growth tax reforms encourages residents to build businesses and create jobs. Lastly, taking care of state finances by properly funding state employees’ retirement plans and saving for a rainy day will ensure that no state is left behind in the next economic downturn.

Tyler Durden Thu, 06/30/2022 - 17:50

Read More

Continue Reading

Spread & Containment

Aging-US | Time makes histone H3 modifications drift in mouse liver

BUFFALO, NY- June 30, 2022 – A new research paper was published in Aging (Aging-US) on the cover of Volume 14, Issue 12, entitled, “Time makes histone…

Published

on

BUFFALO, NY- June 30, 2022 – A new research paper was published in Aging (Aging-US) on the cover of Volume 14, Issue 12, entitled, “Time makes histone H3 modifications drift in mouse liver.”

Credit: Hillje et al.

BUFFALO, NY- June 30, 2022 – A new research paper was published in Aging (Aging-US) on the cover of Volume 14, Issue 12, entitled, “Time makes histone H3 modifications drift in mouse liver.”

Aging is known to involve epigenetic histone modifications, which are associated with transcriptional changes, occurring throughout the entire lifespan of an individual.

“So far, no study discloses any drift of histone marks in mammals which is time-dependent or influenced by pro-longevity caloric restriction treatment.”

To detect the epigenetic drift of time passing, researchers—from Istituto di Ricovero e Cura a Carattere Scientifico, University of Urbino ‘Carlo Bo’, University of Milan, and University of Padua—determined the genome-wide distributions of mono- and tri-methylated lysine 4 and acetylated and tri-methylated lysine 27 of histone H3 in the livers of healthy 3, 6 and 12 months old C57BL/6 mice. 

“In this study, we used chromatin immunoprecipitation sequencing technology to acquire 108 high-resolution profiles of H3K4me3, H3K4me1, H3K27me3 and H3K27ac from the livers of mice aged between 3 months and 12 months and fed 30% caloric restriction diet (CR) or standard diet (SD).”

The comparison of different age profiles of histone H3 marks revealed global redistribution of histone H3 modifications with time, in particular in intergenic regions and near transcription start sites, as well as altered correlation between the profiles of different histone modifications. Moreover, feeding mice with caloric restriction diet, a treatment known to retard aging, reduced the extent of changes occurring during the first year of life in these genomic regions.

“In conclusion, while our data do not establish that the observed changes in H3 modification are causally involved in aging, they indicate age, buffered by caloric restriction, releases the histone H3 marking process of transcriptional suppression in gene desert regions of mouse liver genome most of which remain to be functionally understood.”

DOI: https://doi.org/10.18632/aging.204107 

Corresponding Author: Marco Giorgio – marco.giorgio@unipd.it 

Keywords: epigenetics, aging, histones, ChIP-seq, diet

Sign up for free Altmetric alerts about this article:  https://aging.altmetric.com/details/email_updates?id=10.18632%2Faging.204107

About Aging-US:

Launched in 2009, Aging (Aging-US) publishes papers of general interest and biological significance in all fields of aging research and age-related diseases, including cancer—and now, with a special focus on COVID-19 vulnerability as an age-dependent syndrome. Topics in Aging go beyond traditional gerontology, including, but not limited to, cellular and molecular biology, human age-related diseases, pathology in model organisms, signal transduction pathways (e.g., p53, sirtuins, and PI-3K/AKT/mTOR, among others), and approaches to modulating these signaling pathways.

Follow Aging on social media: 

  • SoundCloud – https://soundcloud.com/Aging-Us
  • Facebook – https://www.facebook.com/AgingUS/
  • Twitter – https://twitter.com/AgingJrnl
  • Instagram – https://www.instagram.com/agingjrnl/
  • YouTube – https://www.youtube.com/agingus​
  • LinkedIn – https://www.linkedin.com/company/aging/
  • Pinterest – https://www.pinterest.com/AgingUS/

For media inquiries, please contact media@impactjournals.com.

Aging (Aging-US) Journal Office
6666 E. Quaker Str., Suite 1B
Orchard Park, NY 14127
Phone: 1-800-922-0957, option 1

###


Read More

Continue Reading

Trending