Like QE, QT comes with the risk of unintended consequences

The Fed is looking to reverse the stimulus pumped into the economy during the pandemic. Quantitative easing is an unconventional monetary policy tool with unintended effects. The Fed's extreme may be partly to blame for the rampant inflation, as it played out in conjunction with a massive fiscal push. Unfortunately, quantitative tightening seems to be the other side of the same coin. How this all pans out is anyone's guess.

Some pundits argue that aggressive monetary policy will usher in a recession, whilst others regard the battle against inflation as all-important and damn the consequences. The truth is that the Fed has a mammoth task with a considerable asset balance of close to $9tn. Moreover, the Fed pumped a mass amount of liquidity into the market, and the question remains what will happen when this is drained - the market may have become reliant on its monthly "fix."

The path seems linked with a trade-off. As the Fed fires its ammunition to combat inflation, growth is likely adversely affected. But, on the other hand, the labour market is robust, and the Fed seems to be betting that this will facilitate a moderately soft landing. This tightening is a gamble, but the Fed has little choice. In hindsight, the loose monetary policy, an unconventional one, overstayed its welcome. However, the pandemic was an odd period, with extreme unemployment in a short period. So the margin for error was always going to be high.

The characterisation of inflation as transitory was debated, with the market firmly of the view that it was, in fact, more malignant than just a temporary blip. This mischaracterisation is perhaps, where the Fed made its momentous error. It stubbornly resisted the urge to view inflation as something more meaningful, particularly given the change of its target from an absolute to an average and the real risk of unintended consequences from QE.

Given this complexity, the geopolitical conflict due to Russia's invasion of Ukraine on 24 February has added considerably to an already uncertain situation. Moreover, rising energy and food prices have introduced the real threat of stagflation - a policy maker's nightmare. Consumer surplus is diminishing rapidly, and this means general welfare too. QE was an unconventional policy with unintended consequences, but QT also contains risk. This complexity adds to a massive uncertainty, which may still need to be reflected in market multiples.