The Federal Open Market Committee recently shed some light on what to expect from the Federal Reserve in the coming year. During the January 26 press conference, Fed Chair Jerome Powell made it clear that while the federal funds rate will be the Fed’s primary tool for curbing inflation, shrinking the balance sheet (otherwise known as quantitative tightening, or QT) will also occur.

Although specific details were not provided — most likely because the Fed is dependent on data dictating its path — quantitative tightening could begin this summer. Powell said that he wants quantitative tightening to occur “in the background,” which, with one exception, is how QT mostly occurred the last time around (that exception being a spike in money-market rates in the third quarter of 2019 that necessitated Fed action).

But Kristina Hooper, chief global market strategist at Invesco, wonders if QT can occur in the background this time around.

“This time around the balance sheet is much bigger, has a shorter duration, economic growth is higher, and inflation is higher,” Hooper writes, adding that at the Fed’s press conference last month, “Powell suggested the Fed could move harder and faster. Which begs the question, ‘Can balance sheet reduction still occur in the background?’”

The last time the Fed reduced its balance sheet was in 2014, when it ended its asset purchases in response to the global financial crisis. But this time, the balance sheet is much bigger and has a shorter duration, economic growth is higher, and inflation is higher than it was during the last reduction.

When the Fed ended its quantitative easing program in 2014, the Fed’s balance sheet stood at approximately $4.5 trillion. Since then, in response to the pandemic, the Fed’s balance sheet has roughly doubled to $8.8 trillion.

“I would like to think it can, given our experience during the last QT round,” Hooper continues. “I am most comforted by knowing that the Fed is committed to being data dependent, which suggests to me that it should be comfortable adjusting its monthly asset reductions depending on incoming data and financial market stability.”

All of this of course has huge implications for bond investors. For investors looking to invest in fixed income ETFs before rates are raised and quantitative tightening begins, Invesco has an array of such funds, including (among many others) the Invesco Total Return Bond ETF (GTO), the Invesco Global Short Term High Yield Bond ETF (PGHY), the Invesco Ultra Short Duration ETF (GSY), and the Invesco High Yield Bond Factor ETF (IHYF).

GTO is an actively managed intermediate-term bond ETF for investors seeking monthly income and total return opportunities. The fund will invest at least 80% of its total assets in fixed income instruments of varying maturities and of any credit qualities.

PGHY seeks to track the investment results (before fees and expenses) of the DB Global Short Maturity High Yield Bond Index. The fund invests at least 80% of its total assets in securities that comprise the underlying index.

GSY uses a low-duration strategy to seek to outperform the ICE BofA US Treasury Bill Index in addition to providing returns in excess of those available in U.S. Treasury bills, government repurchase agreements, and money market funds, while also seeking to provide preservation of capital and daily liquidity.

IHYF seeks to achieve its investment objective by investing, under normal market conditions, at least 80% of its net assets (plus the amount of any borrowings for investment purposes) in high-yield, below investment-grade, fixed income securities, and in derivatives and other instruments that have economic characteristics similar to such securities. It may invest up to 20% of its net assets in U.S. Treasury and agency securities. The fund may also invest up to 10% of its net assets in certain collateralized debt obligations.

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