The key indices of the US stock market – Dow Jones, NASDAQ, and S&P 500 – ended Thursday with another fall, which fully met our expectations. Thus, at the moment, all three indices have already lost more than 50% of the growth that we called illogical and paradoxical and observed in the last month and a half. Given that the Fed's "hawkish" attitude has not changed recently and has even increased slightly, we believe that the lows of 2022 will be updated. In addition to the key rate, which should rise by more than 4%, we should not forget about the QT program, which began functioning this summer. Recall that the Fed's balance sheet swelled to $ 9 trillion during the pandemic. It would have been reduced slowly even if the regulator had not decided to sell securities. This would happen by itself due to the repayment of bonds of different terms. However, the Fed also announced a targeted bond sale, essentially the reverse of the quantitative stimulus program. Thus, reducing the balance sheet is also a "hawkish" measure aimed at "cooling" the economy and fighting inflation.
The Fed's current balance sheet had shrunk to $ 8.85 trillion due to several summer months when the regulator sold bonds worth $ 60 billion per month. Since September 1, this volume has grown to $ 95 billion per month. It is expected that the QT program will work for at least three years, and during this period, it will be possible to reduce the balance by $ 3 trillion, equivalent to a 5% increase in the key rate. Thus, if the regulator decided only to raise rates without the QT program, the total rate would have to be raised to 9% to return inflation to 2%. From our point of view, such measures cannot lead to anything other than a fall in the stock market. The dollar will continue to grow as the money supply will shrink (the Fed gives bonds to the market and takes money from it), and the conditions for investing in risky assets will worsen. The rates of safe assets will increase and, accordingly, the demand for them. What will we have in the end until the end of 2022? The rates are guaranteed to grow, and the QT program is expanding to almost $ 100 billion per month. We would say that the monetary pressure on the economy is only increasing. Therefore, the trend should continue.
