Ryan Grabinski
Portfolio Manager
The Case For Quantitative Tightening Remains Strong
11/02/2022
Key Takeaways
- Still Remains Premature For The Fed To Stop Raising Rates
- Balance Sheet Reduction Is In The Early Stages
- Companies That Are Self-Funding Should Continue To Benefit Under The Current Macro Environment
No Surprise The Fed Is Still Tightening
With inflation proving to be stickier as it moves into "Core" items, the case for further rate hikes is made stronger. It has been our view for sometime that the The Federal Reserve (“Fed”) will continue to raise rates as it attempts to reign in inflation and while we believe the Fed will have to pivot at some point, history shows the The Fed's, Federal Funds Rate (“Fed Funds Rate”) exceeds the Consumer Price Index (“CPI”) rate before a rate-hiking cycle concludes. There remains a view that underlying economic growth could deteriorate quickly from tighter financial conditions and the Fed could be forced to "pivot", returning policy to an easy stance before inflation returns to their 2% target but with the labor market hanging in up untill now, there remains breathing room.
Source: Bloomberg 10/27/2022
Balance Sheet Run Off Still In The Early Stages
The scheduled run-off in the size of the assets on the Fed’s balance sheet to the tune of $95 billion a month is in the very early stages of draining the $5 trillion in excess liquidity pumped into the economic system since the pandemic began. While there is a wide array of data on the impact of Fed tightening via more conventional means, neither the central bank nor investors have much of a historical context for Quantitative Tightening (“Q.T”), caution remains warranted.
Source: Bloomberg 10/27/2022
Companies Not Reliant On External Financing Are Attractive
We continue to believe there is an opportunity to invest in companies that are able to weather tighter financial conditions and specifically, like those that are able to be self-funding. Those business whose operations are generating strong free cash flow, reducing capital expenditures and have already extended their debt maturities during the ultra low rate environment, should stand to benefit. As the competition for capital rises, corporations will now have to evaluate their capital structures more so than at any point over the last 10-years. The debt binge that took place during the quantitative easing environment is coming to an end.
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The Case For Quantitative Tightening Remains Strong
Nov 02 2022