The huge withdrawal of central bank liquidity happening currently is truly “unprecedented” (an otherwise-overused term currently). Despite all of the detailed analysis on the effects of quantitative tightening no one can predict the full impact this will have, but it is certainly not Fed Chair Yellen’s 2017 expectation of “watching paint dry”.
Already this year, equity and bond markets have felt the painful effects of the QT shown in the chart, and even if the plan is only to withdraw the Covid stimulus then there is a long way to go. Just this week, the BOE was forced to change tack in the short term to avoid a meltdown in the gilts market, and the question is whether the other central banks will stay the course.
Undoubtedly, QT has amplified volatility over the past quarters and will continue to do so in the next, and investors should brace themselves for a bumpy ride.