Redditors Question Change To Fed Policy: Are They 'Slowing QT To Prevent A Crash'?

Zinger Key Points
  • The Fed kept rates unchanged but will significantly reduce QT in June, balancing inflation control with maintaining liquidity.
  • Scaling back QT to $25 billion aims to avoid a repeat of the 2019 repo crisis and stabilize the economy.

The Federal Reserve’s recent policy decision kept interest rates unchanged, continuing since July 2023. However, it announced a significant reduction in its quantitative tightening (QT) program, starting in June.

QT involves selling off assets to decrease money supply and raise interest rates. This move follows massive bond purchases during the pandemic, which suppressed interest rates. While QT can help control inflation, it also reduces liquidity in the economy and can lead to higher interest rates and tighter monetary conditions.

The Fed aims to avoid a repeat of the 2019 “repo crisis” caused by QT, and plans to scale back QT to $25 billion, more than half of its current rate.

Related: Federal Reserve Takes Cautious Stand On Inflation, Powell Signals Preference For Rate Cuts Over Hikes

Redditors Question the Effectiveness of Fed’s Decision

Reddit discussions on r/stocks provided valuable insights into the Federal Reserve’s recent decision to reduce quantitative tightening (QT) and its potential impact on inflation and the economy.

Redditors expressed diverse opinions, ranging from concerns about inflation to the Fed’s motives and the broader economic implications.

Redditors like jigglyjohnson13 questioned the effectiveness of the Fed’s decision, citing concerns about inflation and the M2 money supply. They suggested that the Fed may be influenced by the theory that COVID-19 relief caused an explosion in M2, making it challenging to bring inflation down.

Others, such as 95Daphne and goodbodha, believe that the Fed’s decision is driven by the need to maintain stability in the banking system. They argue that the Fed is trying to prevent a financial accident, similar to what happened in the past, and ensure that banks have sufficient reserves.

Some, like Malamonga1 and Invest0rnoob1, see the Fed’s decision as a means to stimulate the economy. They suggest that while the decision may not directly address inflation, it could prevent a crash and support banks facing challenges.

“I think the economy is doing worse than they are admitting. It's mostly being propped up by government spending. They are slowing QT to prevent a crash.”

Redditor Invest0rnoob1

Impact On Investment Strategies

Redditors like fairlyaveragetrader believe the Fed’s decision could impact investment strategies. They suggest the decision could make long-term bonds more attractive and lead to lower rates over the next 18 months, affecting stock investments and overall market outlook.

“Inflation is really only being pushed by two things, housing and auto insurance and neither of those are responsive to QT. What the Fed did today is tell you to buy bonds. The fact they are slowing down the selling is going to make the long end more attractive. Rates overall, over the next 18 months, likely to fall.”

Redditor fairlyaveragetrader

ETFs such as the iShares 20+ Year Treasury Bond ETF TLT, the Vanguard Long-Term Treasury ETF VGLT, and the SPDR Portfolio Long Term Treasury ETF SPTL provide exposure to long-term Treasury bonds. The iShares 7-10 Year Treasury Bond ETF IEF is a popular way to get exposure to medium-to-long-term Treasury bonds.

The diverse opinions expressed by Redditors highlight the complexity of the Federal Reserve’s decision-making process and its potential impact on various aspects of the economy.

Investors should consider these perspectives when analyzing the implications of the Fed’s decision on their investment strategies.

Read Next: Wall Street Inches Up After Powell’s Inflation Remarks; Chipmakers Rebound; Gold, Crude Falter: What’s Driving Markets Thursday?

Illustration created using artificial intelligence via MidJourney.

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