The last few weeks have been a rough ride for investors as they hoped for a peak in inflation that proved not to be, and central banks acted to front-load further interest rate increases. The fallout for both equities and fixed income markets has been clear. The US equity market fell further into bear-market territory – down more than 20 per cent from its high in early January – and yields on government bonds rose. However, what is striking about all of the discussions around the market and economic outlook for the United States of late is what is not being said, specifically quantitative tightening. For a long time, nearly every conversation revolved around the size and composition of central bank balance sheets. Quantitative easing went from being unconventional to mainstream monetary policy, and one that is still being pursued by the Bank of Japan. When the US Federal Reserve and other major central banks around the world were purchasing hundreds of billions of dollars each month in government bonds and other securities, this was viewed as one of the dominant factors when assessing the outlook for markets. That speculation extended to what would happen when the money tap was turned off . With central banks, particularly the Fed, preoccupied with the size and number of interest rate increases, it’s starting to become evident that the shift from quantitative easing to quantitative tightening has happened very quietly in the background. Earlier this month, the Fed took the first step in its balance sheet unwinding by allowing billions in US Treasuries and mortgage-backed securities to mature and roll off the balance sheet without being replaced. The path for running down the balance sheet was well telegraphed by the Fed and had a clear structure. The Fed was careful to outline how assets would be allowed to mature and what value would be reinvested, which allowed markets to roughly calculate just how far the balance sheet would decline. This figure is around US$2 trillion by the end of 2024 and would reduce the Fed’s balance sheet from around US$8.9 trillion to about US$6.8 trillion in the same period. Fed’s attempt to turn inflation tide leaves Asian economies exposed Perhaps one reason an event as significant as the start of quantitative tightening has been seemingly overlooked by the markets is that it has a higher degree of predictability compared to what has been an unpredictable experience with interest rate increases . It is easier to drive when you can see the road ahead of you. This sets the course for the balance sheet, contrasting with the rhetoric from several Fed officials that rate increases are not on a set path and will very much depend on the incoming economic data. The balance sheet unwind looks set to plough on regardless of economic and market conditions. The surprising increase of 75 basis points by the Fed at its June meeting was a clear reminder of the still to be determined path for rates. With every economic data point now potentially shifting the needle on the size of the next rate increase – 50, 75, or even 100 basis points – the run down in the balance sheet looks refreshingly boring. It can’t be said with absolute certainty that declining balance sheets will have no impact on markets. A very large, price-insensitive buyer is being removed from the market with the switch from quantitative easing to quantitative tightening . At least some of the extra liquidity provided by the Fed and other central banks under quantitative easing programmes found its way into asset markets rather than the real economy. Moreover, that seeped into the more speculative corners of the market. But the initial reduction in the balance sheet shouldn’t be a cause for concern as ample liquidity remains. Given the movement in bond markets, where yields have increased and prices fallen sharply, the reduction in liquidity could already be reflected in markets to some extent. Central banks make the policy, so they can change the policy, especially when it comes to the more inventive measures that have been adopted in the decade to achieve inflation targets. But for now, the predictability of the slow balance sheet reduction makes a nice contrast to the continual catching up in rate increases. Kerry Craig is a global market strategist at JP Morgan Asset Management