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Will the Fed Keep Tightening as Banks Fail?


Quantitative tightening is supposed to be boring. That’s by design.It doesn’t demand attention like a bank failure, emergency government rescue, wildly fluctuating interest rates or uncomfortably high inflation.But it is the most important Federal Reserve program you rarely hear about.At its core, it involves reducing the more than $8 trillion — yes, trillion — in bonds and mortgage-backed securities held by the Fed, along with draining money from the financial system. All this shrinkage is part of the Fed’s efforts to quell inflation, which is running at 6 percent a year.Treasury Secretary Janet L. Yellen once said the slimming process should be as dull as “watching paint dry.” Jerome H. Powell, her successor as Fed chair, said it was so straightforward that it should be on “automatic pilot” and wouldn’t merit close scrutiny.They were both being optimistic, if not entirely disingenuous, I’d say.Keeping the enormous asset reduction program boring in a year like this will be a remarkable accomplishment — like parading a barely tamed elephant through city traffic. At any moment, someone could be trampled.Some damage has already taken place. It’s fair to say that the Fed’s gargantuan operation has contributed to the grave problems faced by regional banks and Treasury traders — and to the high mortgage rates that have made it difficult for ordinary people to afford homes.Furthermore, by effectively reducing the money supply, quantitative tightening has amplified the impact of rising rates throughout the economy. And by removing the Fed as the biggest buyer of Treasuries and of mortgage-backed securities, quantitative easing has weakened these markets.Because interest rates and bond prices move in opposite directions, quantitative tightening has cut the value of bonds on bank balance sheets. Such losses were partly responsible for the collapse of Silicon Valley Bank, the biggest bank failure since 2008.Our Coverage of the Investment WorldThe decline of the stock and bond markets this year has been painful, and it remains difficult to predict what is in store for the future.Rising interest rates have also caused the value of th …

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