The Fed is going to botch this
Our call for cuts by June looks on track, but the FOMC's blind spot on QT seems like folly.
Dear readers,
FOMC meetings always tend to bring a touch of the dramatic, but this time, Jerome Powell’s press conference triggered a greater realization. While for most of his microphone handling, Powell deftly maneuvered around every question with a convincing answer on why the economy, labor market, inflation, and rates are all essentially exactly where he wants them. But reading through the lines, because the Fed is hyper-focused on inflation and disinflation to guide the next policy move, it failed to start planning for a problem that is sure to reappear: QT is unsustainable. When Powell said the committee would start discussion on plans for QT in March, I knew right then that this was going to be another Fed botch job. You’re going to want a front seat and some bitcoin.
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How the Fed will mess this up
FOMC voters decided not to adjust policy in January, but made a material shift in the statement to eliminate any hiking bias and introduce a not-yet-but-maybe cutting tone. This was well-telegraphed—in December, it became clear that future rate cuts were already starting to dominate the conversation. However, what was not well-telegraphed was the absence of any discussion on the balance sheet. We should have known, judging by this article from two weeks ago:
This tells me that the Fed had already made up its mind that balance sheet discussions would not be on the table for the FOMC in January. Until then, let’s truly scrutinize just how arbitrary and unthoughtful the Fed’s approach to the balance sheet was going into and including today:
Jan 20 (Reuters) - The Federal Reserve can probably start to slow its balance sheet runoff once bank reserves fall to around 10% or 11% of gross domestic product, Fed Governor Christopher Waller said on Friday.
"We'll start slowing as we approach maybe reserves being 10% to 11% of GDP," Waller said at a Council of Foreign Relations event in New York. "And then we'll kind of feel our way around to see where we should stop."
What?
They’ll feel their way around it? They’re kidding, right?