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Could it Be the Fed’s Mega-QE Created So Much Liquidity That Tightening Doesn’t Work Until This Excess Gets Burned Up?

November 13, 2023

by Wolf Richter Wolf Street

Financial Conditions loosen further: credit markets blow off the Fed to make sure “higher for longer” gets entrenched? That would be funny.

One of the big surprises this year is that the Fed’s 5.5% policy rates and $1.1 trillion in QT have neither meaningfully tightened financial conditions nor slowed the economy.

The Fed has been “tightening” since early 2022 in order to “tighten” the financial conditions, and these tighter financial conditions are then supposed to make it harder and more expensive to borrow which is supposed to slow economic growth and remove the fuel that drives inflation. “Financial conditions,” which are tracked by various indices, got a little less loose, and then they re-loosened all over again. It’s almost funny.