So, the Fed’s decision to end QT now, even if it is a bit ahead of schedule, is probably a wise one. It will give the financial system more time to adjust to the new post-QT normal. Last year, market participants were surprised by the volatility brought on by the Fed’s shrinking balance sheet. This year, they will be able to adjust to the new — more abundant — level of reserves at a more measured pace.
What did the market think of this? The reaction was mixed. On one hand, the announcement is bullish for risk assets, as it implies more liquidity in the financial system. On the other hand, the move suggests the Fed is more concerned about the economy than it was three months ago. That’s a mixed bag for stocks, which like to see growth but like to see a dovish Fed more.
The Fed’s abrupt change to QT also raises an interesting question for the future: what will the Fed do with its balance sheet once it stops shrinking it? The minutes of the January FOMC meeting suggest the bank will be left with a balance sheet that is larger than what it had before the financial crisis. That’s because the Fed has accumulated a big pile of short-term Treasury bills in recent months to help manage its balance sheet. That pile is now $340bn. The Fed could reduce that pile, or it could keep it as a permanent feature of the system.
Both choices are fraught. If the Fed reduces the pile, it risks sparking another round of market volatility. If it keeps the pile, it risks permanently changing the structure of the market for short-term government debt. The bank has some time to think about it — the pile won’t start shrinking until next month at the earliest — so no need to rush.
And that’s the news from the Fed. It’s a lot of news. And it’s all news the market will need to digest in the coming days. We hope you’ll digest it with us. Have a good Thursday.
Robert Armstrong in New York and Alistair Gray in London
Jika QT dan lonjakan penerbitan Surat Utang Negara baru terjadi secara bersamaan, krisis likuiditas mungkin akan mengancam.
Pelambatan QT adalah kabar baik bagi pasar. Ekuitas menghargai likuiditas tambahan. Dan, meskipun efek QT dan QE terhadap imbal hasil Surat Utang Negara kemungkinan kecil, semua hal lain sama, akhir QT seharusnya sedikit mengurangi imbal hasil Surat Utang Negara juga.
Kami senang menerima Powell pada katanya. Tapi kebetulan bahwa melambatnya QT akan sedikit mengurangi tekanan selama musim panas yang mungkin tegang di Capitol Hill dan di sistem keuangan. Beberapa anggota Partai Republik fokus pada utang nasional, sementara sebagian besar anggota Partai Demokrat mencari cara untuk melawan Trump. Itu meningkatkan risiko kesengsaraan fiskal saat Kongres memutuskan apa yang harus dilakukan terhadap batas utang. Lebih baik menghilangkan risiko dari meja jika memungkinkan.
(Reiter)
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