On top of rate hikes, the Fed has been reducing its balance sheet since June 2022. As you can see in the table below, over the last 22 years, the balance sheet has increased almost 1000%, and the Fed has tried QT three times during this period, unsuccessfully. Maybe the fourth is the charm, and this time they are able to implement a meaningul reduction. But in the past, recessions and crisis have deterred the process. This is important because the main cause of inflation is money printing, not consumption, and reducing the balance sheet is more impactful than rate hikes. The question is if the Fed will be able to stay the course, when the going gets tough, as it happened before; in fact, after every attempt to taper, there has been a big increase in money printing to compensate for the negative impact of expansions. Finally, there’s almost a perfect correlation between the Fed’s balance sheet and the S&P500 that has been broken lately. Has the market truly uncoupled from money tightening?
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