QT Risks

Last week, Producer Price Index (PPI) data showed a decline in inflation, but not as much of a drop as the consensus had expected. That’s an important theme going into the week ahead, when we’ll be getting CPI inflation data on Tuesday followed by the FOMC meeting on Wednesday. The consensus expects CPI inflation to fall from 7.7% in October to 7.3% in November—still far above the Federal Reserve’s 2% inflation target but moving in the right direction. The Fed has signaled that after several rate hikes of 75 basis points, they only need to raise rates by 50 basis points in December, which represents an important downshift. Meanwhile, in addition to raising interest rates, the Fed is substantially running down its balance sheet. This quantitative tightening (QT) program is expected to cause the amount of risk-free assets in markets to rise steadily in 2023, potentially crowding out demand for other fixed income products while also putting upward pressure on long-term treasury rates.

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