FOMC Preview: Aiming For Neutral Might Be Hawkish Amidst Bull Markets
(5 min read)
If this were any other period (or more like any other dimension), Fed Chair Powell should express some concerns over the growing speculation that has now spread to all of the corners in the market. But given the economic outlook’s fragility, we highly doubt he will do so. That said, there is a risk that a market hooked on easy money can still get disappointed if there are no promises of new liquidity ahead. Powell will aim for a neutral message, highlight the launch of various Fed facilities and stick to administrative aspects, like walking markets through their new economic projections.
Balance-sheet Growth Has Slowed Due to the Tapering of POMOs
The balance sheet has increased by over $500bn since the last regularly scheduled FOMC meeting in April. That is still a massive amount versus the prior QEs, which would have taken months to see the Fed’s balance sheet grow that much. However, that seems slow in comparison to the six weeks prior to the April FOMC where the balance sheet grew roughly $2tn!
As seen in Chart 1, most of the balance-sheet growth was in the liquid product space (i.e. USTs and MBS) but the Fed has clearly pivoted away from buying at all costs and in huge sizes to stabilize markets (for a while it really did feel like ‘ludicrous speed’ from the movie Spaceballs) to a more normal-sized pace of POMOs (permanent open market operations).
With the Treasury having to term out its debt more on a go-forward basis couched against no signs of an immediate emergency, that would require the Fed to all of a sudden start buying USTs and MBS at a much fast pace again, along with only a gradual usage in the new liquidity facilities, lower amounts of Fed easing is consistent with our view that net new liquidity is behind us – as per our US Policy Net Liquidity Challenges report.
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