With his usual cautious tone, Powell stated that the Fed’s plan “is to stop the depreciation of the (organization’s) balance sheet when reserves are slightly above the level that is considered consistent with conditions of abundant reserves.” And he added: “We could get closer to that point in the coming monthsand we are closely monitoring a wide range of indicators to inform this decision.”
consulted by Scopethe analyst Sailing Investments, Theo Headexplained that “from mid-2022, the Federal Reserve has been gradually reducing the size of its balance sheet, which currently stands at around US$6.6 billionafter having reached a maximum close to US$9 trillion during the stimulus program implemented to sustain financial markets and economic activity following the 2020 pandemic.”
This process, known as “quantitative tightening” (quantitative adjustment), “implied a progressive withdrawal of liquidity from the financial systemwhich in turn reduced bank reserves.” In this sense, Head commented that in his statements, Powell “hinted that the central bank could be close to ending this campaign of more than three yearsaimed at reducing the enormous portfolio of Treasury bonds accumulated during the pandemic.”
Similarly, the analyst Pepperstone, Felipe Barragánexplained to this medium that Powell’s comment “is interesting since it suggests that the organization would stop withdrawing liquidity from the market, perhaps adopting a somewhat more expansive bias, but with caution“.
Accordingly, Pablo LazzatiCEO of Insider Financecommented that the “most relevant development for the markets” was that “it opened the door to a possible end to the quantitative adjustment in the coming months and maintained ‘data dependent’ approach on future rate movements“.
The market celebrates
Lazzati highlighted that after Powell’s presentation, “the yields of Treasuries fell, the dollar weakened slightly and stocks operate smoothly on the American stock market.” On this point, he stressed that “there were no surprises, but there was a clear signal: The Fed is in no hurry, but it also did not close the possibility of starting to cut soon if the data supports“.
He highlighted that “Powell spoke today in a cautious but optimistic tone. He acknowledged that the US economy is stronger than expected in some variablesalthough there are still mixed signals in inflation and employment.
For his part, Head commented that “in relation to interest rates, Powell did not contradict market expectations that the Fed could cut rates at its next meeting on October 28-29although he avoided confirming it explicitly.
Expectations of an upcoming 25 basis point cut for the October 29 meeting they remain intactwith the 96.7% probability among the market actors that the FedWatch.
Powell’s warnings
“While the unemployment rate remained low during August, Payroll growth has slowed sharplylikely in part due to a decline in labor force growth due to lower immigration and labor participation. In this less dynamic and somewhat weaker labor market, downside risks to employment appear to have increased“Powell said this Tuesday.
On this point, Barragan He commented to this medium that this statement “confirms the expectation that decisions on additional interest rate cuts will be made “meeting by meeting” and will depend largely on the evolution of the data.”
And he added that “Powell continued to emphasize that inflation remains above the 2% target, and part of the pressure comes from the prices of imported goods, where the effects of tariffs and trade tariffs on prices remain to be seen.”
The absence of official data
Asked if he was concerned about the lack of official data resulting from the closure of the North American federal government, he mentioned that they still maintain “a wide variety of public and private data”as well as “a wide variety of contacts at the national level through the regional federal reserves.
In this sense, he highlighted: “Based on the information we do have, it is safe to say that the outlook for inflation and employment has not changed much since our September meeting a few weeks agoHowever, he acknowledged that if the shutdown continues and October data is not available, that would be a problem, he suggested: “If this continues for a while, data will not be collected and the situation could get complicated“.
Furthermore, he mentioned that under the current situation in which the United States finds itself, there is no risk-free alternative. “You have a situation where inflation is above target and generally rising and the labor market has a pretty clear downside risk. That is not a problem that central banks generally have.“, he stated.
Source: Ambito
