Inside the markets: Fed tries tricky soft landing again
Written by Paritosh Bansal
March 28 (Reuters) – As the Fed approaches a rare soft landing for the U.S. economy, it faces another difficult challenge: trimming cash in the financial system without disrupting markets.
The Fed has already cut about $1.4 trillion as it shrinks its balance sheet to end pandemic-era support, and the focus is increasingly on when to stop. The fear is that if cash in the banking system, known as reserves, exceeds a certain minimum level, the market will freeze. However, no one knows which level is appropriate.
Fed Chairman Jerome Powell said last week that policymakers were nearing a decision to slow. Pace of quantitative tightening (QT) To “land well and easily” reserves. Powell said he was watching “a variety of indicators” in money markets “to let us know when it's coming.”
Market participants said the Fed is focused on reassuring Wall Street, even if the task ahead is difficult. This is difficult because the line is vague. The Fed is moving from “rich” to “abundant” reserves without running out of reserves. And the market signals that guide it are noisy and difficult to discern.
Measures the Fed is likely to be looking at include bank reserves, some key interest rates in money markets, and cash held in the Fed's overnight reverse repurchase agreement facility., they said.
Mark Kavanagh, head of U.S. rates strategy at Bank of America, said it would be “quite a feat” for the Fed to engineer a soft landing that leaves adequate reserve levels in the banking system. But he added that he thought there was a “decent chance” now because they were taking a more accommodative stance.
“Last year, in November and December, the Fed would have told us that the risk of missing it was very high,” Kavanagh said.
He expects the Fed to announce a taper as early as May, cutting in half the limit on the amount of U.S. Treasuries it seeks to offload each month to $30 billion.John Velis, BNY Mellon's Americas macro strategist has a similar view on the scale and timing of the taper.
It's important for the Fed to properly track drawdowns, because running out of reserves can cause interest rates to spike suddenly, disrupting government bond markets and making it difficult for businesses to raise capital.it may be obtained will be tested in the next few weeks In conjunction with QT, events such as Tax Day on April 15 increase demand for cash while decreasing it in the financial system. But so far, the market has maintained its functioning.
In 2019, a sharp rise in short-term funding rates forced the Fed to pump reserves back into the system, but despite subsequently putting in place a backstop to support money markets, Chairman Powell said the Fed He said he did not want to be tested again.
rich reserves
estimated value of Minimum amount of bank reserves The amount needed ranges from approximately $2.5 trillion to $3.3 trillion. Such reserves currently total approximately $3.5 trillion.
While it seems abundant, bank cash demand has increased. Kavanagh noted that reserves at the start of QT in summer 2022 have increased from $3.3 trillion to $3.5 trillion. He attributed this to lenders adding to reserves following deposit outflows following bank failures in March 2023, as well as unrealized losses on securities portfolios.
Additionally, reserve allocations may vary by bank, making it difficult to achieve sufficient reserves, as Powell acknowledged last week. “While total reserves appear to be plentiful, the Fed appears to be aware that they are not well distributed across the system,” BNY’s Bellis said.
The measure of excess cash is the Fed's reverse repurchase facility, where investors lend cash to the central bank. It has been on the decline, but the pace has slowed in recent weeks.
There are differing views on when it will be completely depleted and what will happen to liquidity within the system. Bellis predicts the water could be completely gone by the summer, while Kavanagh doesn't think it will be completely drained until the middle of next year. UBS strategists said it could rise in the second quarter at the expense of provisions.
money market indicators
Among the indicators the Fed has announced it is looking at are two money market rates related to the interest rate on reserve balances (IORB), the federal funds rate at which banks lend to each other and the benchmark collateralized overnight rate. There is a loan interest rate (SOFR). What the Fed pays banks.
Kavanagh expects the central bank wants to keep the Fed's funding about 10 basis points higher than it is now and 2 to 3 basis points higher than the IORB.. On SOFR, he expects rates will need to rise by 10 to 15 basis points and remain 0 to 5 basis points above the rate the Fed pays banks.
That's because total system cash is likely to approach abundant levels if investors have to pay slightly more than the Fed-managed rate to acquire it, Kavanagh said. .
Interest rates are likely to rise gradually as foreign exchange reserves decline, but for the time being, the imbalance in supply and demand may cause a temporary spike in interest rates like in 2019, which central banks should pay attention to. It's a sign.
“The Fed will look at both interest rates and associated volatility to determine when QT actually needs to be suspended,” Kavanagh said.
decrease in cash https://reut.rs/3PDMcuL
(Reporting by Paritosh Bansal; Editing by Anna Driver)
((paritosh.bansal@thomsonreuters.com;))
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Summarize this content to 100 words
Written by Paritosh Bansal
March 28 (Reuters) – As the Fed approaches a rare soft landing for the U.S. economy, it faces another difficult challenge: trimming cash in the financial system without disrupting markets.
The Fed has already cut about $1.4 trillion as it shrinks its balance sheet to end pandemic-era support, and the focus is increasingly on when to stop. The fear is that if cash in the banking system, known as reserves, exceeds a certain minimum level, the market will freeze. However, no one knows which level is appropriate.
Fed Chairman Jerome Powell said last week that policymakers were nearing a decision to slow. Pace of quantitative tightening (QT) To “land well and easily” reserves. Powell said he was watching “a variety of indicators” in money markets “to let us know when it's coming.”
Market participants said the Fed is focused on reassuring Wall Street, even if the task ahead is difficult. This is difficult because the line is vague. The Fed is moving from “rich” to “abundant” reserves without running out of reserves. And the market signals that guide it are noisy and difficult to discern.
Measures the Fed is likely to be looking at include bank reserves, some key interest rates in money markets, and cash held in the Fed's overnight reverse repurchase agreement facility., they said.
Mark Kavanagh, head of U.S. rates strategy at Bank of America, said it would be “quite a feat” for the Fed to engineer a soft landing that leaves adequate reserve levels in the banking system. But he added that he thought there was a “decent chance” now because they were taking a more accommodative stance.
“Last year, in November and December, the Fed would have told us that the risk of missing it was very high,” Kavanagh said.
He expects the Fed to announce a taper as early as May, cutting in half the limit on the amount of U.S. Treasuries it seeks to offload each month to $30 billion.John Velis, BNY Mellon's Americas macro strategist has a similar view on the scale and timing of the taper.
It's important for the Fed to properly track drawdowns, because running out of reserves can cause interest rates to spike suddenly, disrupting government bond markets and making it difficult for businesses to raise capital.it may be obtained will be tested in the next few weeks In conjunction with QT, events such as Tax Day on April 15 increase demand for cash while decreasing it in the financial system. But so far, the market has maintained its functioning.
In 2019, a sharp rise in short-term funding rates forced the Fed to pump reserves back into the system, but despite subsequently putting in place a backstop to support money markets, Chairman Powell said the Fed He said he did not want to be tested again.
rich reserves
estimated value of Minimum amount of bank reserves The amount needed ranges from approximately $2.5 trillion to $3.3 trillion. Such reserves currently total approximately $3.5 trillion.
While it seems abundant, bank cash demand has increased. Kavanagh noted that reserves at the start of QT in summer 2022 have increased from $3.3 trillion to $3.5 trillion. He attributed this to lenders adding to reserves following deposit outflows following bank failures in March 2023, as well as unrealized losses on securities portfolios.
Additionally, reserve allocations may vary by bank, making it difficult to achieve sufficient reserves, as Powell acknowledged last week. “While total reserves appear to be plentiful, the Fed appears to be aware that they are not well distributed across the system,” BNY’s Bellis said.
The measure of excess cash is the Fed's reverse repurchase facility, where investors lend cash to the central bank. It has been on the decline, but the pace has slowed in recent weeks.
There are differing views on when it will be completely depleted and what will happen to liquidity within the system. Bellis predicts the water could be completely gone by the summer, while Kavanagh doesn't think it will be completely drained until the middle of next year. UBS strategists said it could rise in the second quarter at the expense of provisions.
money market indicators
Among the indicators the Fed has announced it is looking at are two money market rates related to the interest rate on reserve balances (IORB), the federal funds rate at which banks lend to each other and the benchmark collateralized overnight rate. There is a loan interest rate (SOFR). What the Fed pays banks.
Kavanagh expects the central bank wants to keep the Fed's funding about 10 basis points higher than it is now and 2 to 3 basis points higher than the IORB.. On SOFR, he expects rates will need to rise by 10 to 15 basis points and remain 0 to 5 basis points above the rate the Fed pays banks.
That's because total system cash is likely to approach abundant levels if investors have to pay slightly more than the Fed-managed rate to acquire it, Kavanagh said. .
Interest rates are likely to rise gradually as foreign exchange reserves decline, but for the time being, the imbalance in supply and demand may cause a temporary spike in interest rates like in 2019, which central banks should pay attention to. It's a sign.
“The Fed will look at both interest rates and associated volatility to determine when QT actually needs to be suspended,” Kavanagh said.
decrease in cash https://reut.rs/3PDMcuL
(Reporting by Paritosh Bansal; Editing by Anna Driver)
((paritosh.bansal@thomsonreuters.com;))
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
https://www.nasdaq.com/articles/in-the-market:-fed-piloting-another-tricky-soft-landing Inside the markets: Fed tries tricky soft landing again