In the face of the complex economic situation in the USA, it is worth paying attention to how much pressure the balance sheet of the Federal Reserve can bear as it shrinks, and the upcoming interest rate cuts may also have a reverse effect on reducing the balance sheet.
As the market expects the Fed to start a rate-cut cycle, Wall Street speculates that the shrinking balance sheet operation is also coming to an end.
On Friday, Bank of America strategists Mark Cabana and Katie Craig proposed in a report to clients that if the Fed decided to cut rates to stimulate the economy, the ongoing quantitative tightening is likely to be suspended; However, if the purpose of the rate cut is to achieve policy normalization, then quantitative tightening may continue.
Given the complexity of the economic situation, how much pressure the Fed's massive $7.2 trillion asset portfolio can withstand without causing cracks similar to those seen in the money markets five years ago is a concern.
A few weeks ago, the market was relatively optimistic about economic growth expectations. But recent signs suggest that the slowdown in the economy may be greater than expected. This shift has sparked a massive rebound in the global bond market, with traders betting on more aggressive rate cuts by the Fed and other central banks.
The market's expectation for a Fed rate cut has risen sharply, and it is expected that the Fed may take action before the September FOMC meeting. Currently, the market prices in a 38 basis point rate cut in September.
Currently, the Fed's reserve balance is as high as $1.37 trillion, the highest level in nearly two months. The market believes that this level of reserves is sufficient, but if the Fed allows this amount to be excessively reduced, it may trigger volatility in the overnight funding market, as it did in September 2019. Every trading day this month, the Fed's overnight reverse repo agreement (RRP) has decreased until Thursday, falling to $287 billion, the lowest level in more than three years, and trading volume slightly rebounded to $303 billion on Thursday.
Moreover, once rate cuts begin, as policy makers have discussed in the past, rate cuts and balance sheet shrinking together may have a reverse effect, and sudden economic declines may pose a threat to a smooth transition.
In terms of product structure, the operating income of products worth 10-30 billion yuan were respectively 401/1288/60 million yuan.
In addition, once the interest rate begins to be reduced, as policy makers have discussed in the past, the rate reduction and balance sheet contraction may have a reverse effect, and the sudden decline in the economy may pose a threat to a smooth transition.
Editor/Somer
