# Central banks start turning off the cash taps
Author:  Pal Sinha, Barnali 
Author URL: https://financedigest.com/author/pal-sinha-barnali
Published: 2022-01-13
Category: BANKING
Category URL: https://financedigest.com/category/banking
Meta Title: Quantitative Tightening: Balancing Central Bank Stimulus
Meta Description: Explore how central banks are navigating the end of quantitative easing and impending balance sheet reductions with insightful visualizations.
URL: https://financedigest.com/central-banks-start-turning-off-the-cash-tapshtml

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By Tommy Wilkes

LONDON (Reuters) – As speculation grows about when the Federal Reserve will begin reducing the size of its balance sheet, some analysts say the era of “quantitative tightening” has already started.

Central bank balance sheets ballooned after the pandemic struck in 2020, but with economies rebounding and inflation soaring above target, central bankers are preparing markets for a reversal to their bond-buying stimulus.

Below are a series of graphics laying out the scale of [central bank](https://www.financedigest.com/inflation-trumps-financial-risks-as-central-bank-tightening-set-to-continue.html "Inflation trumps financial risks as central bank tightening set to continue") stimulus and what might happen next.

SLOWING, THEN SHRINKING

[Markets tumbled this month at the prospect of the Fed](https://www.financedigest.com/markets-start-signalling-fed-may-be-going-too-far-amundi.html "Markets start signalling Fed may be going too far – Amundi") hiking interest rates as early as March with quantitative tightening — a shrinking of its $8.8 trillion balance sheet after it doubled in size during the pandemic — following afterwards.

Still, other central banks such as the European Central [Bank are likely to keep adding to global liquidity](https://www.financedigest.com/boes-bailey-says-bank-reforms-worked-but-questions-about-liquidity-buffers.html "BoE’s Bailey says bank reforms worked but questions about liquidity buffers") this year, offsetting some of that tightening.

That means that while the [rate of expansion in the overall central bank](https://www.financedigest.com/central-banks-keep-hiking-rates-amid-banking-turmoil.html "Central banks keep hiking rates amid banking turmoil") liquidity pool has been slowing since mid-2021, an outright reduction of balance sheets is not expected until late-2022 or even 2023.

![](https://www.globalbankingandfinance.com/wp-content/uploads/2022/01/355.jpg)

(Graphic: [Global central bank](https://www.financedigest.com/global-shares-jump-but-bank-whack-a-mole-not-over.html "Global shares jump but bank ‘whack-a-mole’ not over") stimulus – https://fingfx.thomsonreuters.com/gfx/mkt/gdpzykbekvw/cbank%20sheet.JPG)

BofA strategists expect major [central bank](https://www.financedigest.com/central-banks-hike-rates-again-but-a-pause-is-coming.html "Central banks hike rates again, but a pause is coming") balance sheets to stabilise rather than shrink in 2022, although as a percentage of GDP they estimate the major central banks will see a decline versus 2021 levels.

Steve Donzé, senior macro strategist at Pictet Asset Management, estimates the Fed, ECB, [Bank of Japan, Bank of England, People’s Bank of China and the Swiss National Bank will collectively expand their balance sheets by $600 billion in 2022 — far below the post-financial crisis](https://www.financedigest.com/how-the-2023-banking-crisis-unfolded.html "How the 2023 banking crisis unfolded") average of $1.8 trillion and 2021’s $2.6 trillion, but still a net addition.

However, he [says that the $600 billion forecast](https://www.financedigest.com/publisher-bloomsbury-casts-upbeat-forecast-says-books-affordable-pastime.html "Publisher Bloomsbury casts upbeat forecast, says books ‘affordable pastime’") could turn negative if the Fed tightens faster than anticipated today.

And a stronger dollar meant that for global investors, the five [biggest central banks](https://www.financedigest.com/open-data-represents-the-biggest-challenge-to-banks-in-a-generation.html "Open data represents the biggest challenge to banks in a generation") actually withdrew more stimulus in the three months to the end of December than they injected versus the preceding three months — the first quarter-on-quarter reduction since before the pandemic, according to his calculations.

![](https://www.globalbankingandfinance.com/wp-content/uploads/2022/01/354-724x500.jpg)

(Graphic: [Central bank](https://www.financedigest.com/stock-pickers-reckon-its-time-to-move-on-from-central-banks.html "Stock pickers reckon it’s time to move on from central banks") liquidity flows-https://fingfx.thomsonreuters.com/gfx/mkt/klvykqbawvg/pictet%20global%20liquidity.PNG)

Donzé reckons Fed tightening, driven by the end of quantitative easing, [rate hikes](https://www.financedigest.com/bank-of-england-set-to-hike-to-4-as-rate-peak-looms.html "Bank of England set to hike to 4% as rate peak looms") and then QT, will result in a 4.7 percentage point rise in a U.S. shadow” real policy [rate to -1.8% by the end](https://www.financedigest.com/testing-waters-hungarys-central-bank-flags-cut-in-top-end-of-rate-corridor.html "Testing waters, Hungary’s central bank flags cut in top end of rate corridor") of 2022.

This shadow [rate rose 6 percentage points](https://www.financedigest.com/polish-central-bank-holds-rates-points-to-slowdown-ahead.html "Polish central bank holds rates, points to slowdown ahead") during the last tightening cycle, but that was over five years, between 2014 and 2019.

FLOWS NOT LEVELS

With [central bank](https://www.financedigest.com/dollar-skulks-at-eight-month-low-central-bank-meetings-in-focus.html "Dollar skulks at eight-month low, central bank meetings in focus") balance sheets towering above a huge $25 trillion, many observers say that even after some tightening liquidity will remain plentiful and rates historically low.

![](https://www.globalbankingandfinance.com/wp-content/uploads/2022/01/353-668x500.jpg)

(Graphic: [Central bank](https://www.financedigest.com/european-central-bank-to-raise-deposit-rate-to-3-25-by-mid-year-reuters-poll.html "European Central Bank to raise deposit rate to 3.25% by mid-year: Reuters poll") balance sheets, total assets – https://fingfx.thomsonreuters.com/gfx/mkt/akvezexqwpr/cenbank%20balance%20sheets.PNG)

Yet it’s the direction of travel that matters for [markets pumped](https://www.financedigest.com/automotive-variable-oil-pump-market-expanding-at-a-healthy-2-9-cagr-the-market-size-is-projected-to-total-us-10-6-bn-by-2030.html "Automotive Variable Oil Pump Market Expanding at a healthy 2.9% CAGR, the market size is projected to total US$ 10.6 Bn by 2030") up on cheap cash.

Negative inflation-adjusted bond yields suggest the party will continue but as Citi’s Matt King notes central [bank stimulus flows are falling fast and “markets](https://www.financedigest.com/in-a-rising-market-are-banking-outsourcers-pulling-their-weight.html "In a rising market, are banking outsourcers pulling their weight?") follow flows, not levels.

JP Morgan strategists point out that excess money [supply — the balance of gross money supply versus money demand — has been falling](https://www.financedigest.com/oil-prices-extend-gains-with-falling-supplies-in-focus.html "Oil prices extend gains with falling supplies in focus") since May by one measure, and the decline in “excess liquidity” is set to accelerate this year.

![](https://www.globalbankingandfinance.com/wp-content/uploads/2022/01/352.jpg)

(Graphic: Excess money supply – https://fingfx.thomsonreuters.com/gfx/mkt/jnpwejbmlpw/jpm%20money%20supply%20chart.PNG)

They also calculate that money [supply growth](https://www.financedigest.com/all-terrain-vehicle-market-demand-supply-growth-factors-latest-rising-trend-and-forecast-to-2027.html "All-Terrain Vehicle Market Demand, Supply, Growth Factors, Latest Rising Trend and Forecast to 2027") will decline from a $7.5 trillion per annum pace in 2021 to $4.5 trillion in 2022 and $3 trillion in 2023 — a level last seen in 2010.

(Editing by Saikat Chatterjee and Hugh Lawson)


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