welcome to money is freedom
a podcast
exploring how finance and freedom connect in our lives
created from thoughtful research
and narrated by Notebook LM AI
this series brings you clear
meaningful insights into finance and beyond
welcome to episode 38 the Fed just hit the brakes
sort of QT more like QT light
the feds slowing its balance sheet run off by 50%
and markets are loving it well
kind of
in this episode we break down what the heck is going on
why Jerome Powell is suddenly acting chill
and what this all means for your portfolio
your crypto bags and your sanity
let's ride the liquidity wave
alright so you know
you sent this over and I was like whoa
the fit is slowing down QT yeah
so that's something we gotta dig into like
what does that even mean yeah
so that's what we're gonna do today
you know you and I were gonna take a deep dive into
what's going on with this whole Fed decision to
to slow down quantitative tightening right
why they're doing it what it might mean for the markets
you know for your stocks for your crypto
everything like that for sure
we got a bunch of articles uh
it's really good market analysis
awesome and uh yeah
let's just jump into it sounds good
so maybe just to you know
level set for everyone yeah
what is quantitative titing
like how would you explain that to someone yeah
so QT it's essentially the opposite of Q E
which we've talked about a bunch right
quantitative ething
and this is the Fed shrinking their balance sheet
so okay they
you know
they've bought all these assets over the years to
to help the economy
and now they're sort of unwinding that right
and yeah this
this is a big deal
because it's the first major change to this policy
since they started in 2022
oh wow
so like they've been just going at it yeah
just full scheme ahead full scheme ahead
and now now they're tapping the brakes a little bit
okay so what are they actually gonna do differently
like what did they announce
so according to AP News they're going to reduce
the monthly cap for Treasury runoff from six
billion dollars down to 30 billion okay
so they're gonna cut it in half wow
and that starts in June
and the cap for mortgage backed securities
those are gonna stay the same for now okay
so just the the Treasury is getting cut in half
exactly interesting
okay so
so why now like why
why do they making this move
like what's what's going on
so there's a few reasons uh
one of the big ones that our sources are pointing to
especially in the analysis is liquidity management okay
so the Fed is
really worried about reserves becoming too scarce okay
remember what happened in the repo market back in 2019
when uh
you know there was a shortage of reserves
and that caused all sorts of problems
yeah it's like a little mini crisis
yeah they
they don't wanna repeat that right
so okay
so how does slowing down QT help with that
so as the feds balance sheet shrinks
bank reserves decrease right
okay and then on top of that
we've got this declining usage of the ONRP
the overnight reverse repo facility
okay
and that's basically like a parking lot for extra cash
you know right
money market funds park their money there overnight at
gotcha when that usage goes down
it means there's less surplus cash in the system
makes sense
which puts more pressure on those bank reserves
so it's like they're losing their cushion a little bit
okay so that's making them a little nervous exactly
were there any other
like factors pushing them in this direction
yeah for sure
Reuters was talking about some concerns
with the Treasury market oh really
specifically with these off the run issues
what does that mean so
these are Treasury bombs that aren't
the most recently issued ones
oh okay
so they're not traded as frequently right
it can be harder to buy or sell them quickly
quickly and that can create some instability
oh so less liquid
exactly
and the sources also mentioned some worries about
basis trades
which are these like complex bets on similar assets
oh well okay
and if those go wrong
it can cause a lot of problems in the market
so all of this is just adding to this overall anxiety
about liquidity
and how well the markets are gonna function
it's like they're trying to
you know just keep everything running smoothly
yeah exactly
okay so it sounds like they were seeing some red flags
and they decided to like
you know kind of ease off a little bit right now
I gotta say this this move
didn't really come as a surprise to a lot of people
right right
like
it seems like the market was kind of expecting this why
why do you think that is well
you know it's an election year
oh yeah
and the Fed doesn't wanna rock the boat too much
they want things to be stable
yeah
and big policy changes can cause a lot of volatility
makes sense plus
Powell has been using some pretty cautious language
lately oh yeah
like what talking a lot about financial stability
and a soft landing for the economy
right
even though he's not saying they're gonna cut rates
right the market is reading between the lines a bit
you know taking the hints
exactly and
Marketwatch pointed out that
a lot of analysts were saying that QT
was moving faster than expected really
and they were worried about it
squeezing those bank reserves too quickly
wow so
I think
the market was picking up on all of these signals
yeah
it sounds like Powell was kind of laying the groundwork
yeah maybe dropping some hints
okay so let's talk about the market reaction
like what happened when they made this announcement
well the stock market loved it really
yeah AP News said the SMP 500
the NASDAQ the Dao all jumped over 1% that day
wow that's a pretty big jump
yeah they saw this as a good thing for a liquidity
you know
less risk of those bank reserves getting too strained
right
but some of those games did fade a bit the next day
oh really
yeah I think
people started to think about the longer term
implication yeah
makes sense okay
what about bonds what happened there
the 10 year Treasury yield dropped to like 4.24% okay
there's two reasons for that 1
less QT
means less supply of Treasuries hitting the market
right and 2
it's seen as a sign that the Fed might be getting more
dubbish okay
corporate bonds reacted similarly
you know
investment grade bond DTFs like LQD saw price jump
which means yields went down
gotcha but again
that enthusiasm cooled off a bit
as investors reassessed you know
what this might mean for future rate cuts right
so kind of like the same pattern as stocks
exactly initial excitement
then a little more caution
yeah okay
now what about crypto land
like what happened with Bitcoin and all that
that was interesting
bitcoin and Ethereum were pretty steady
actually with a slight upward trend
okay it seems like that macro
liquidity
environment is still a big driver for those assets
especially for the big institutional investors right
so they're paying attention to this Fed stuff
oh yeah for sure
okay so we've talked about what the Fed did
why they did it how the market reactive
now let's talk about what this could mean for
you know your portfolio okay
like what's the implications for stocks
so generally slower QT is good for stocks
how so it means more liquidity in the system right
and that tends to boost prices
especially for those growth stocks
like in the tech sector why tech specifically
those are considered hydration assets
because their value is more tied to future earnings
okay
and future earnings are sensitive to interest rates
which are influenced by QT
I see okay
so more liquidity more money flowing into stocks
potentially higher prices exactly
what about valuations
like how does this affect how expensive stocks look
so that's where the lower bond yields come in
okay when treasure yields go down
it actually makes stocks little more attractive really
how so it increases the equity risk premium
what's that that's the extra return
investors expect for holding riskier assets
like stocks compared to safe assets like bonds
so when that premium is higher
it can justify higher price to earnings ratios
especially for those growth companies
interesting
so lower bond yields actually make stocks look cheaper
in a way yeah
you could say that it creates a valuation tailwind okay
that's a good way to put it
and what about like the overall stability of the market
how does this affect that
well slowing down Q t reduces uncertainty
and the risk of those sudden shocks right
which can help to keep voltility down okay
so less chance of those big swings in the market
yeah potentially
okay so overall
it sounds like this is pretty good news for stocks
at least in the short term
yeah I think that's fair to say
okay now let's talk about crypto
like what does this mean for bitcoin
and the whole crypto world
you know that the sources really emphasize this
especially the one about the crypto market cycle
okay there's a very strong link between
bitcoin and the overall crypto market
and these macro liquidity trends right
when the Fed is easing or even just slowing down
tightening it's good for risk on assets
and crypto's definitely risk on
oh yeah
for sure okay
so this slowdown could be good for crypto too
absolutely and you know
you've got this whole thing with spot Bitcoin
Epfs developing rights
bringing more institutional money into the space
yeah and now
you've got this more accommodative stance from the Fed
feels like a double whammy of good news
it could be a very bullish setup
you know if liquidity keeps expanding
we could see a new up trend
wow okay
so maybe crypto's back on the menu potentially
alright so it sounds
like the market is seeing this as a sign that
things are changing like a fetish
shifting gears a bit yeah
I think that's a good way to put it
it's not Q E right
they're not actively pumping money into the system
right but this slowdown
combined with all the talk about rate cuts
later this year
it's creating this kind of quasi dovish environment
I like that term quasi dovish
and historically
those kinds of conditions have been really good for
risk assets
like crypto interesting
okay so to wrap this all up
what's the big take away for our listeners
the main thing is that the Fed slowing down
Q t is a strong signal that this aggressive
tightening phase is probably coming to an end
they haven't cut rates yet
but the market is taking this as a dubish sign
so they're reading between the lines
yeah they're saying
the Fed is worried about overtightening
and potentially causing problem right
they gotta be careful exactly
so for everyone listening out there
you know this raises some big questions for you
definitely like
what does this shift in liquidity mean
for your investments
how does all this stuff with the Fed
and the stock market in crypto
all tied together right
and maybe it's worth looking back at history
you know
seeing what happened during other waziedovish periods
that's a great idea yeah
see if we can learn anything from the past
yeah awesome
well thanks for breaking all that down for us
that was super helpful my pleasure
alright everyone
until next time see ya
happy investing bye