The economy and stock market may ultimately benefit from the policy shift, but historical patterns suggest conditions could deteriorate before improving.
U.S. Federal Reserve Chair Jerome Powell has revealed that the Fed will soon halt its balance sheet reduction program, known as quantitative tightening (QT). However, this policy change may not be the bullish stock-market catalyst many investors expect.
The Fed’s decision carries weight, as it has been removing substantial liquidity from the financial system. Given that some of this liquidity could have flowed into equities, quantitative tightening (QT) has likely been a notable drag on the stock market, with the Fed reducing its balance sheet by $2.2 trillion since June 2022. It stands to reason that halting QT could deliver a significant lift to the stock market.