QT2: Judgement Day

Some prior posts on QT, mostly from 2018. 

This is a chart from November 2018 that helps show the relatively high correlation between the S&P 500 and the Fed's balance sheet within one week.

Feb 2018: Will Fed Balance Sheet Reduction Be QE in Reverse? only has this chart:

Feb 2018: A Look Back at 2015- gives some economic context.

March 2018: Federal Reserve Bought Treasuries in March a reminder that QT, like the taper, will be voluntary and lumpy even if they don't backtrack

May 2018: Another Narrative Failure: Foreign Treasury Sales a reminder that selling treasuries could be forced by dollar illiquidity. Still many traders are looking for a weaker dollar, but these tightening episodes have been dollar bullish in the past.

May 2018: Fed to Investors: Not Our Fault You Overpaid for Assets my paraphrasing after Powell discussed capital flows out of EMs and into the US.

May 2018: Contrarian View: Higher Interest Rates and Deflation who knows what happens now, but the underappreciated risk for markets is the Fed normalizes policy. This could happen if say the CPI gets to around 6 percent, the Fed is at 4 percent, the economy is clearly in recession and the Fed announces it will halt rate hikes as long as the CPI stays flat or declines. This is the "there is no pivot, QE is over" horror show for equity bulls.

May 2018: Does Fed Balance Sheet Matter

April 2022: RIP Bull Market, QT is Here

I went back and tagged a bunch of posts with the QT label. Many of them are weekly updates on the Fed's balance sheet.

I do not expect major balance sheet changes until later in June, but given the history, I think we can also guess what the next weekly update will show by the behavior of the market. It's not perfect, but in 2018 it was good enough. If stocks tumble, there will likely be an associated drop in the Fed balance sheet.