Today's traders have built their trading strategy within the Quantitative easing program that has reigned in Forex over the past few years. Soon the situation will change dramatically as the Fed has decided to change its policy and switch to a Quantitative tightening program for at least 3 years.
Many traders, especially newbies, haven’t even heard of these concepts. Despite this, they will all have to adapt to the new program, as a change in direction can greatly affect their trading results. Let's see what these programs are and how they affect the market.
Quantitative Easing Program
The system itself consists of buying long-term and government bonds without taking into account the Central Bank interest rates, which puts the economy in a state of excessive liquidity.
It all started in 2006, when the Fed had to sharply lower the rate to support financial markets due to the mortgage crisis. Due to the lack of results, the Fed began to periodically conduct a quantitative easing program, hoping to cover the growth in the money supply through GDP growth.
The periodic launch of the QE program led to a constant fluctuation in the inflation rate. During the second cycle in 2011, inflation jumped to 3.6%. Three rounds of the program could not lead to economic growth in the US. In 2014, the Fed switched to a quantitative tightening program for the first time.
The crisis of 2020 forced a return to the quantitative easing program. More than $2 trillion has been injected into the economy. The injection for the first three rounds of the program totaled $1.2 trillion.
Due to the pandemic and lockdowns, US businesses could not effectively absorb the money received, which led to a giant inflation growth. To improve the economy state, the Fed decided to introduce the QT program. According to forecasts, it will take three years to change the situation for the better.
Quantitative Tightening Program
The purchase of bonds led to the growth of the Fed's balance sheet to such an extent that even a 36% increase in GDP is not able to cover inflation. Therefore, the Fed has begun a cycle of rising interest rates in March. In summer 2022, the US will begin the sale of bonds within the Quantitative tightening program. By January 2023, the Fed is hoping for a noticeable reduction in the balance sheet.
Over the next three years, the QT program is expected to withdraw $2-2.5 billion in banknotes. Only 5% growth of the US economy and a 2% interest rate will be enough to sharply reduce inflation in the near future.
To achieve these goals, the Fed must take $100 billion out of the market every month. Each auction will have a significant impact on the currency market, resulting in noticeable candles and jumps on the chart. In the next article, we will find out how the program can affect cryptocurrency and Forex traders.
Quantitative Easing vs. Quantitative Tightening
So QE and QT are the opposite action. Quantitative Easing is used to stimulate the economy, reduce interest rates and make businesses and citizens invest or simply spend more money, while Quantitative Tightening is used to cool the economy. The significant risk of Quantitative Tightening is the effect that may destabilize financial markets and cause a global economic crisis. On the other hand, Quantitative Easing might lead to high inflation, as it was during COVID-19, and currency devaluation.