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Good morning. The new European Defense Fund said He will buy weapons only sources from the EU or countries with defense agreements with the block. This seems to us to be sensitive from a European point of view but, as believers in world capitalism, it despairs us a little. Send us an email and tell us how we must feel: Robert.armstrong@ft.com And aiden.reiter@ft.com.
Fed prospects and market response
The market liked what he heard from Jay Powell and the Federal Committee of the Open Market yesterday. No one was doing cart wheels, but stocks, which had enjoyed a good day before the declaration and the press conference, increased more later, although the enthusiasm decreased a little at the end of the day. Treasury yields fell – two years by three base points, then 10 years by one. A meeting endowed, then?
Not really. It is easy to imagine a world in which investors listened to what the bank had to say yesterday and did not love it at all. The Committee has reduced its growth prospects Significantly, has increased its hair unemployment prospects and also increased its inflation prospects. Here are the median numbers as presented in the Fed summary, with arrows added by non -covered:
There is a word for this kind of thing, and it’s a bad word: stagflation. Not that the Fed provides for a bad case of the big S, but still, expectations tend to the wrong sense on both sides of the central bank’s mandate. And the Fed was clear about the reason for this: the sharp decline in the feeling of investors, businesses and consumers was largely precipitated by concerns about the Trump administration policies, in particular prices.
Yes, the projection policy for interest rates has remained the same. But this projection is an average, and it hides a movement towards a stricter policy. Cutting the three highest and lowest individual estimates and the “central trend” in terms of policy has gone from a range of 3.6 to 4.1% to 3.9 to 4.4%. It’s not nothing. During the press conference, Powell drew attention to the growing uncertainty of committee members about their projections – an uncertainty that is not only higher, but asymmetrical and almost entirely on the side of slower growth and higher inflation. Below, the uncertainty of the members of the Fed Committee on the unemployment rate (compared to historical levels) and on which side they place it:
All of this is a bit scary. So why does the not bare market response? There are some possibilities:
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The Fed has sent a message that the market had already received. The market knew that political concerns increased the risks of growth and inflation.
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There was a relief that the Fed did not really show its teeth on the risk of inflation placed by the prices. Powell has taken a measured tone, stressing that it could be appropriate to browse the price increases induced by prices as long as long -term inflation expectations remain under control. It is not a central bank that seeks to fight with the executive power.
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The market, desperate for good news after a month of bruises, decided to draw its attention to the projections of unchanged interest, excluding everything else.
We leave readers to decide their own weighting between these three.
The end of QT
The Fed surprised the market yesterday by announcing a spectacular slowdown to the rhythm of quantitative tightening: a change of allowing $ 25 billion in titles to exceed the balance sheet each month at only $ 5 billion. It is not surprising that qt is coming to an end; by most measuresWe are close to the objective of the Fed of “ample”, but not the abundant bank reserves.
Most forecasts for the end of last year suggested that QT would end in the first half, probably in June. The photo has changed since then – the report of the FOMC meeting in January showed that the Fed governors were planning to end QT earlier than expected if there were “swings in the reserves in the coming months linked to the dynamics of the debt ceiling”. Despite this, the analysts with whom we spoke before the meeting suggested by the SunSing QT meeting would begin in May, not in March.
Yesterday, President Powell said that the slowdown was only part of the normal QT course and did not reflect the concern about the debt ceiling. It is a different message from the grades of the January meeting. And such a concern would be justified: the debt ceiling, or the limit to what the United States can borrow to finance in progress deficits, were reinstated at the beginning of this year, after a two-year suspension. Until the debt limit is increased or suspended, the treasure cannot issue a new net debt. Instead, he spent his account of $ 414 billion at the Fed.
The clock turns. Even with new tax revenues, the treasure should lack money “this summer, potentially in August”, according to Briting Khurana at Wellington Management. After that, the treasure will have to take “extraordinary measures“To prevent the US government from fault.
The congress will most likely increase the debt ceiling before it happens – although there will be almost certainly political theaters around doing so. After that, the treasure will have to issue a new debt to rebuild its chests. If this were to coincide with QT, there would be double pressure on the liquidity of the financial system that the Fed would like to avoid, explains Guneet Dhingra, chief strategist of the United States prices at BNP Paribas:
When the treasure runs its cash balance, this adds liquidity [banking] system. But when the treasure rebuilds its cash flow [by issuing more Treasuries]This money goes from the banking system to the Treasury Fed account. This draws liquidity from the banking system. QT also takes liquidity from the system.
The treasure issued a new debt in 2022 when QT was in full swing. But at that time, there was more liquidity and more sources of liquidity (such as funds in the reverse buyout program). If QT and a burst of new treasures have occurred simultaneously, a liquidity crisis may have threatened.
The slowdown in QT is welcome for the market. Actions appreciate additional liquidity. And, although the effect of QT and QE on treasury yields is probably low, everything else is also equal to the end of QT should also reduce the yields of the treasury.
We are happy to take Powell to the word. But it turns out that the slowdown in QT will remove some pressure during what could be a tense summer on Capitol Hill and in the financial system. Some Republicans focus on national debt, while most democrats are looking for ways to push Trump. This increases the risk of budget brassard while the congress decides what to do with the debt ceiling. It is better to remove the risks of the table where you can.
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