the federal reserve’s almost 9 trillion portfolio is about to be reduced starting on wednesday in a process intended to supplement rate hikes and buttress the central bank’s fight against inflation while the precise impact of “quantitative tightening” in financial markets is still up for debate analysts at the wells fargo investment institute and capital economics agree that it’s likely to produce another headwind for stocks and that’s a dilemma for investors facing multiple risks to their portfolios at the moment as government bonds sold off on tuesday and stocks nursed losses   in a nutshell “quantitative tightening” is the opposite of “quantitative easing” it’s basically a way to reduce the money supply floating around in the economy and some say helps to augment rate hikes in a predictable manner though by how much remains unclear and it may turn out to be anything but as dull as “watching paint dry” as janet yellen described it when she was fed chair in 2017 the last time when the central bank initiated a similar process   qt’s main impact is in the financial markets it’s seen as likely to drive up real or inflationadjusted yields which in turn makes stocks somewhat less attractive and it should put upward pressure on treasury term premia or the compensation investors need for bearing interestrate risks over the life of a bond  what’s more quantitative tightening comes at a time when investors are already in a pretty foul mood optimism about the shortterm direction of the stock market is below 20 for the fourth time in seven weeks according to the results of a sentiment survey released thursday by the american association of individual investors meanwhile president joe biden met with fed chairman jerome powell tuesday afternoon to address inflation the topic at the forefront of many investors’ minds  read biden pledges adherence to centralbank independence as he meets with fed chief powell and biden’s meeting on inflation with fed’s powell seen as ‘good for the president politically’  “i don’t think we know the impacts of qt just yet especially since we haven’t done this slimming down of the balance sheet much in history” said dan eye chief investment officer of pittsburghbased fort pitt capital group ”but it’s a safe bet to say that it pulls liquidity out of the market and it’s reasonable to think that as liquidity is pulled out it affects multiples in valuations to some degree”   starting on wednesday the fed will begin reducing its holdings of treasury securities agency debt and agency mortgagebacked securities by a combined 475 billion per month for the first three months after this the total amount to be reduced goes up to 95 billion a month with policy makers prepared to adjust their approach as the economy and financial markets evolve  the reduction will occur as maturing securities roll off the fed’s portfolio and proceeds are no longer reinvested as of september the rolloffs will be occurring at “a substantially faster and more aggressive” pace than the process which started in 2017 according to the wells fargo investment institute   by the institute’s calculations the fed’s balance sheet could shrink by almost 15 trillion by the end of 2023 taking it down to around 75 trillion and if qt continues as expected “this 15 trillion reduction in the balance sheet could be equivalent to another 75 – 100 basis points of tightening” at a time when the fedfunds rate is expected to be around 325 to 35 the institute said in a note this month   the target range of the fedfunds rate is currently between 075 and 1   “quantitative tightening may add to upward pressure on real yields” the institute said “along with other forms of tightening in financial conditions this represents a further headwind for risk assets”   andrew hunter a senior us economist at capital economics said that “we expect the fed to reduce its asset holdings by more than 3 trillion over the next couple of years enough to bring the balance sheet back in line with its prepandemic level as a share of gdp” though that shouldn’t have a major impact on the economy the fed might stop qt prematurely if economic conditions “sour” he said  “the main impact will come indirectly via the effects on financial conditions with qt putting upward pressure on treasury term premiums which alongside a further slowdown in economic growth will add to the headwinds facing the stock market” hunter said in a note the key uncertainty is how long the fed’s rundown will last he said   as of tuesday afternoon major us stock indexes spx comp djia were lower meanwhile treasury yields were higher across the board led by gains in the 10year rate tmubmusd10y as bonds sold off         we should have a look at qt and what it means for bonds and stocks if not other assets…an explainer that lays it out clearly