Federal Reserve Watch: More Tightening To Come

William_Potter

The individual depletion expenditures value scale ("PCE") roseate successful January, year-over-year, astatine a 5.4 percent yearly rate.

Core PCE roseate by 4.7 percent, a emergence complete nan December number. Core PCE excludes nutrient and power prices.

PCE Price Index (Wall Street Journal)

As mightiness beryllium expected, banal prices dropped.

The S&P 500 Stock Index was down 60 points by 10:00 am.

Implication: Federal Reserve still has a ways to spell successful its conflict to trim ostentation and, hence, nan Fed will beryllium raising its argumentation complaint of liking for immoderate clip into nan early and will proceed to trim nan size of its securities portfolio.

This is not bully news for nan banal market.

Quantitative Tightening

The Federal Reserve reduced its securities portfolio by only a small spot successful this past banking week.

Securities held outright declined by only $3.6 billion, bringing nan full simplification successful nan securities since nan "tightening" programme began successful nan mediate of March 2022 to $503.6 billion.

However, reverse repurchase agreements roseate by $108.9 cardinal successful nan past banking week, drafting down slope reserves by a larger number.

Overall, reserve balances pinch Federal Reserve Banks, a proxy for excess reserves, dropped by conscionable nether $124.0 billion.

Apparently, astatine nan existent level of nan Fed's argumentation complaint of interest, 4.58 percent, reserves had to time off nan banking strategy successful bid to support nan complaint astatine this level.

The accusation is that location is plentifulness of liquidity successful nan banking strategy and nan effective Federal Funds complaint would person fallen from its 4.58 percent level if nan level of reverse repurchase agreements had not risen by nan magnitude cited above.

In fact, since March 16, 2022, nan level of reverse repurchase agreements has risen by $607 cardinal giving america immoderate penetration into really nan Federal Reserve is managing nan "tightening" program.

Yes, nan Federal Reserve has reduced its securities portfolio by complete $500 billion, but, helping to soft nan emergence taking spot successful nan effective Federal Funds rate, nan Fed has had to oversee different alteration successful reserves arsenic reverse repurchase agreements person risen by $607 billion.

It should beryllium noted that nan Federal Government has returned conscionable nether $270 cardinal to nan banking strategy successful deposits, a activity that accrued commercialized slope reserves.

Since March 16, 2022, excess reserves successful nan commercialized banking system, measured by nan magnitude of Reserve Balances pinch Federal Reserve Banks person fallen by almost $910 billion.

Implications

One conclusion I tie from these numbers is that location is simply a tremendous magnitude of money disposable to investors successful nan American financial system.

The Federal Reserve is reducing nan size of its equilibrium sheet, but it is besides relying connected nan "repo" marketplace to return moreover much reserves retired of nan commercialized banking strategy successful bid to support nan Federal Funds complaint astatine nan level nan Fed designates it to be.

The level of "reverse repos" connected nan Fed's equilibrium expanse is market-driven, but shows really liquid nan financial markets are that specified a ample magnitude of "repos" are needed.

The quantitative tightening (QT) continues. The Federal Reserve wants to support its subject connected this portion of its existent argumentation program. Note nan "steady" diminution successful nan Fed's securities held outright

Securities Held Outright (Federal Reserve)

Looking astatine this floor plan we tin opportunity that nan Federal Reserve really wants to support a very disciplined attack to nan existent simplification successful its securities portfolio.

Obviously, nan Fed is utilizing nan "repo" marketplace to negociate nan magnitude of liquidity successful nan banking strategy and, successful nan existent situation, oversee nan simplification successful slope reserve balances that are needed to support nan level of nan Fed's argumentation complaint of interest.

Problem

The Fed, itself, has, since nan opening of 2020, injected tons and tons of money into nan banking strategy to avert a awesome financial situation connected pinch nan dispersed of nan Covid-19 pandemic.

That is, nan Fed, itself, created an plus bubble during this clip period, thing that I person written rather a spot about.

Now, arsenic we know, nan Fed is engaged successful QT successful bid to reverse immoderate of nan problems that this plus bubble created.

There is different problem that analysts are now worried about...the plus bubbles that are being created by different cardinal banks astir nan world.

Gillian Tett points to this problem successful her file successful nan Financial Times this morning.

Ms. Tett writes astir nan liquidity that different cardinal banks astir nan world are providing.

The Bank of Japan, nan People's Bank of China, and nan European Central Banks person been pumping tons of money that is going into world markets.

Ms. Tett writes, "The nett consequence is that these 3 cardinal banks person collectively pushed almost $1.0 trillion of further liquidity into nan world strategy since October (when adjusted for speech rates)."

"This much than offsets what nan Fed has done. Call it, if you like, immoderate accidental anti-QT."

No wonder, she states, that nan U.S. banal marketplace has been connected nan emergence since nan mediate of October.

S&P 500 Stock Index (Federal Reserve)

Note that nan S&P 500 banal scale (SP500) was astatine 3,584 connected October 14, 2022 and closed yesterday astatine 4,014.

Wow!!! A 12.0 percent rise!

Ms. Tett closes her article pinch this suggestion:

"The cardinal constituent for American investors is this: moreover arsenic they way ostentation data, firm net and Fed speeches astatine home, they request to watch what [is going connected elsewhere successful nan world]."

So, what does each this further liquidity successful nan world mean to nan Federal Reserve?

More activity ahead.

John M. Mason writes connected existent monetary and financial events. He is nan laminitis and CEO of New Finance, LLC. Dr. Mason has been President and CEO of 2 publically traded financial institutions and nan executive vice president and CFO of a third. He has besides served arsenic a typical adjunct to nan caput of nan Department of Housing and Urban Development successful Washington, D. C. and arsenic a elder economist wrong nan Federal Reserve System. He formerly was connected nan module of nan Finance Department, Wharton School, nan University of Pennsylvania and was a professor astatine Penn State University and taught successful some nan Management Division and nan Engineering Division. Dr. Mason has served connected nan boards of task superior costs and different backstage equity funds. He has worked pinch young entrepreneurs, particularly wrong nan municipality environment, starting aliases moving companies chiefly connected pinch Information Technology.