Quantitative tightening (QT) has wide-spanning effects on the economy, as it puts upward pressure on risk-free interest rates due to increased supply in debt markets (assuming all else equal). The Fed announced its QT strategy just one meeting (5/3/22) after hiking its target rates for the first time since 2018 back in March. The previous QT cycle in 2017 did not begin until about two years after the Fed first started hiking rates. The reason for the quick turnaround this time around, though, stems from the fact that inflation has been running rampant, and the balance sheets of consumers and corporates are in relatively strong positions.
In terms of how various asset classes may perform in the current period of QT, some investors have looked back to the prior period of QT for insight. As mentioned above, there are some important distinctions between the current period and the last period of QT, so it may not be an apples-to-apples comparison, but there are certainly some similarities that can make knowing what happened back then helpful. Using the price of gold over the last 15 years as a backdrop, the chart below shows key events related to periods of quantitative easing (QE) and QT. The event surrounding each dot is summarized in the table below. Click here to learn more about Bespoke’s premium stock market research service.
Between October 2017 and July 2019 (the last QT cycle), the price of gold rose by 12.6%, which works out to an annualized return of 6.5%. Over the last 15 years, the price of gold has held an annualized return rate of 6.8%, so there was no clear differentiation in the performance of gold during that period of QT and the last 15 years as a whole. Looking at the chart, though, much of the gains from the last cycle of QT came late in that cycle as the Fed had already announced its intent to end the running off of assets from its balance sheet. In fact, the S&P 500 outperformed gold by more than six percentage points during the last QT cycle. In fact, before the March 2019 announcement that the Fed would wind down its balance sheet, gold was practically unchanged relative to the start of the QT cycle. Click here to become a Bespoke premium member today!