Understanding in the federal reserve does not frighten markets

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Good morning. New European Defense Fund He says He will only buy weapons from European Union sources, or from countries with defensive agreements with the bloc. This strikes us as reasonable from the European point of view, but, as believers in global capitalism, it makes us a little despair. Email us and told us how we should feel: [email protected] and [email protected].

Federal reserve expectations and market response

I love the market what it heard from Jay Powell and the Federal Open Market Committee yesterday. No one was doing the vehicle, but the stocks, which had a strong day before the statement and the press conference, rose after that, although enthusiasm declined a little at the end of the day. Treasury revenues-two years have decreased by three basis points, then 10 years. Duvish meeting, then?

Not real. It is easy to imagine a world in which investors listened to what the bank said yesterday and did not like it a little. Committee She cut her outlook From the task, her outbreak of unemployment was increased by hair, and she collided with inflation expectations as well. Below are the middle numbers as shown in the Federal Reserve Summary, with the addition of shares by the unconfirmed:

There is a word for this type of things, which is a bad word: stagnation. The Federal Reserve does not predict a bad condition for the Big S, but still, expectations are wrongly heading on both sides of the central bank’s authorization. The Federal Reserve was clear about the reason for this: the sharp decrease in the investor, business and consumer that it deposited largely through concerns about the Trump administration policies, especially the customs tariff.

Yes, the projection of the interest rate policy remained as it is. But this projection is average, and it hides the move towards a more strict policy. Three trim, the least individual estimates and expectations of the “central trend” of policy moved from 3.6-4.1 percent to 3.9-4.4 percent. This is not something. At the press conference, Powell drew attention to the increasing uncertainty of the committee members about their expectations – the uncertainty not only higher, but almost completely asymmetric alongside the slower growth and higher inflation. Below is the Federal Reserve Plan for the Committee members on the unemployment rate (for historical levels) and any aspect they put on:

This is a little frightening. So why did the incomplete market respond? There are some possibilities:

• The Federal Reserve has delivered a message that the market has already received. The market has known that politics fears have increased the risks to growth and inflation.

• There was relief because the Federal Reserve did not show its teeth at the risk of inflation posed by definitions. Powell took a measuring tone, stressing that it may be appropriate to consider the increase in the prices caused by the customs tariff as long as the forecasts of inflation remain long -term under control. This is not a central bank looking to choose a battle with the executive authority.

• The market, which is desperate for good news after a month of bruises, decided to prove its attention to the interesting expectations that have not changed, to exclude everything else.

We leave it to readers to determine their weighting among these three.

End of QT

The Federal Reserve surprised the market yesterday by announcing a great slowdown on the pace of quantitative tightening: a change in allowing $ 25 billion in securities to abandon the public budget every month to only 5 billion dollars. It is not surprising that QT is approaching its end; by most SizesWe are close to the goal of the Federal Reserve represented in “abundant”, but not abundant, bank reserves.

Most of the expectations from the end of last year indicated that QT will end at some time in the first half of the year, probably in June. The image has changed since then – minutes of the FOMC meeting in January showed that the federal reserve rulers were considering ending QT at an earlier time than it is planned if there were “fluctuations in reserves in the coming months related to the dynamic roof dynamics.” However, the analysts we talked to before the meeting suggest that Sunsetting QT will start in May, not March.

Yesterday, President Powell said that the slowdown was just part of the natural path of QT and did not reflect the concern about the roof of the debt. This is a different message from the January meeting notes. Such anxiety will be justified: the roof of the debt, or the limit that the United States can borrow to finance the continuous deficit, was re -suspended after a two -year suspension. Until the debt limit is raised or suspended again, the Treasury Ministry cannot issue a new debt. Instead, it spends its account of $ 414 billion at the Federal Reserve.

The clock is knocking. Even with new tax revenues, the treasury is scheduled to run out of money “at one time this summer, it is likely to be August,” according to Brai Khourana in Wittton Management. After that, the Ministry of Treasury will need to take it.Unusual measures“To prevent the United States government from backwardness.

Congress is likely to raise the roof of the debt before it happens – although there will definitely be political plays about doing so. After that, the Treasury will need to issue new debts to rebuild its treasures. If that should coincide with QT, then there will be a double breed on the liquidity of the federal reserve bank to avoid, says Genteet Dharingra, the US Senior Strategy in the United States at BNP Paribas: says:

When the Treasury drops down its cash balance, that liquidity adds to the (banking) system. But when the Treasury Ministry rebuilds its cash balance (by issuing more treasury), these funds are transferred from the banking system to the Federal Reserve Bank account. That attracts liquidity from the banking system. QT also takes liquidity from the system.

The Treasury issued new debts in 2022 when QT was in full swing. But at the time there was more liquidity and more liquidity sources (such as money in the reverse purchase program). If the QT and the opening of the new cabinet release at one time, the liquidity crisis may be threatened.

QT slowdown is welcome to the market. Additional liquidity stocks are estimated. Although the QT and QE effect on the cabinet returns is likely to be small, everything else is equal to QT slightly reduces the treasury yield as well.

We are pleased to take Powell in his speech. But this only happens that the slowing of QT will stop some pressure during what may be a tense summer in the Capitol Hill and in the financial system. Some Republicans focus on national debt, while most Democrats are looking for ways to respond against Trump. This raises the risk of the edge of the financial abyss, as Congress decides what to do on the roof of the debt. It is better to take the risks from the table where you can.

((Reich))

One good reading

Bruce