Tightening warning from two market giants

Global markets are closely following the Fed’s moves regarding policy rates as well as the steps regarding balance sheet reduction. Two important players in the markets, JPMorgan and Morgan Stanley, have drawn attention to the optimism in pricing the balance sheet reduction. Some economists believe that the Fed’s quantitative tightening (QT), which refers to the reduction in the balance sheet, has not been sufficiently priced. According to JP Morgan Asset Management Economist Bob Michele and Morgan Stanley Economist Michael Wilson, the Fed’s balance sheet reduction is not reflected in bond prices. Michele drew attention to the fact that the difference between private sector bonds and policy rates is still “very expensive.” Arguing that this gap does not sufficiently reflect recession risks, Michele said, “Quantitative tightening will make its impact felt more next month.” The Fed will increase its balance sheet reduction pace to $95 billion per month in September. Michael Wilson, on the other hand, argued that the Fed could tighten even in a recession, considering the current levels of inflation.