As the fallout from Jackson Hole continues to ripple through markets, investors have their eyes on more drama stemming from the central bank. The Federal Reserve this week is set to raise the throttle of its quantitative tightening (QT) program by picking up the pace at which it unwinds its balance sheet. The move is a stark reversal of pandemic-era bond buying, which saw the central bank nearly double its balance sheet to nearly $9T from $4.2T over the past two years.

Unlike the large rate hikes being broadcast by the Fed - which have been quick to capture investor attention - QT is a more opaque way of tightening financial conditions. Note that the central bank is not selling its Treasury holdings outright, but is rather letting them mature to shrink its balance sheet. After an initial few months at a slower pace, monthly caps for offloading Treasuries and mortgage-backed securities are set to double to $60B and $35B, respectively, compared to the peak combined rate of $50B the last time the Fed trimmed its balance sheet in 2017-2019.

The whole thing is somewhat of a complicated accounting process, involving settlement windows and redemption caps, but at a basic level, it ultimately reduces the supply of bank reserves and drains money from the financial system. Some safety valves have been implemented this time around, like the Standing Repo Facility, after chaos in the repo market prompted an early end to the last QT program in 2019. The new facility will allow primary dealers to borrow more reserves from the Fed against high-quality collateral, but some caution it might not be enough to stave off liquidity issues, and could complicate Chair Powell's plan to raise rates and bring inflation under control.

"I don't think there is appreciation for QT, by markets or the Fed," said Solomon Tadesse, head of quantitative equities strategies North America at Societe Generale. "In the end, if QE mattered, so will QT. It might not be totally symmetrical, but there will be a meaningful impact."