Macroscope | It’s goodbye QE, hello QT, as central banks end easy money ride for stock markets amid runaway inflation
- Markets, used to thinking that the worst case is an increase in the cost of money, are unprepared for the money being taken off the table. The risk of a stock market collapse is real and the next crisis could be in shadow banking
Through it all, stock markets have stood tall – or so it would appear. Trade wars, bond market “taper tantrums”, the Covid-19 pandemic, return of inflation, rising interest rates, war in Ukraine and now economic sanctions – stock markets have survived the lot. Can nothing shake them?
Well, yes, it can, and soon will, judging from what should be (but apparently isn’t) the obvious fact that markets are about to transition from QE to QT – from quantitative monetary easing to quantitative tightening. This will be a whole new ball game, one that most countries haven’t played.
It is the potentially shrinking “quantity” of money rather than its rising cost that will knock stocks off their pedestal. Stock investment is no longer connected to corporate earnings or economic fundamentals; it is about the capacity of financial institutions to bankroll investors.
We’ve all become familiar with QE as central banks increased the quantum of money in the system by buying financial securities from the market. But QT is less familiar except for a brief episode in 2019 when the Fed tried it, before backing off in alarm at the effect on market sentiment. Why should they follow through with tightening this time when they backed off before?
