NN Investment Partners: Bye bye QE, hello QT

NN Investment Partners: Bye bye QE, hello QT

Inflation United States Fed
Inflatie (04)

Inflation is proving much more long lasting than had been previously imagined, and in response the Fed has quickly adopted a more hawkish approach. As well as an end to quantitative easing (QE), a series of rate hikes and quantitative tightening (QT) now look to be on the cards.

But even though inflation has remained high for longer than was expected, it could still fall back quickly. If this is how it pans out, the Fed will be forced into a dovish volte-face.

Conversely, if it persists for longer, the Fed may become even more hawkish. Against this kind of uncertain backdrop, volatility looks likely. In his latest macro column, Willem Verhagen, Senior Economist, Multi-Asset at NN Investment Partners shares his insights on the matter at hand.

'Just a few months ago, tapering had still not started and Fed policymakers and market participants were debating whether rate hikes would begin in 2022 or 2023. Now, the Fed is set to end tapering in March and start rolling off its balance sheet later this year.'

According to Verhagen a rate hike in March looks extremely likely and the market is toying with the idea of four hikes this year. 'This represents a rather large hawkish pivot and many investors will be wondering where it will all end. Unfortunately, this is extremely difficult to answer because the range of potential outcomes for inflation is very wide indeed.'

He adds: 'One can easily imagine a scenario in which the Fed is compelled to turn even more hawkish, but it could just as well be that it will be forced into a dovish pivot relative to its current policy plans. The only certainty at present is that 2022 looks to be shaping up to be a volatile year.'