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Vanishing Bond Market Liquidity Bad for Fed Balance Sheet Unwind

  • Poor liquidity in rates a risk to Fed quantitative tightening
  • Price volatility could eventually force unwind to end early
Bloomberg business news
Bill Dudley Says Fed Won't Make QT Mistakes 'This Time'

Worsening liquidity conditions will likely condemn quantitative tightening to an early end, despite the hopes of optimists. 

Bill Dudley in a Bloomberg Opinion article today suggests that QT is unlikely to “cause any major disruptions.”  But this makes two implicit assumptions: the Federal Reserve has control over how its balance sheet declines, and liquidity conditions in rates markets are stable and supportive.