Published: Sat, March 23, 2019
Money | By Ethel Goodwin

Inside the Fed's balance sheet in four charts

Inside the Fed's balance sheet in four charts

Fed Chair Jerome Powell said last month that the Fed will stop shrinking its $4 trillion balance sheet later this year, ending a process that investors say works at cross-purposes with the Fed's current pause on interest-rate hikes.

"The stock market may not agree with the recessionary message from the Treasury market, but it would be foolish to disregard this bond curve move entirely", he wrote. And though the review is still in its early stages, the Fed already seems to have embraced the idea that inflation should be allowed to exceed 2% without immediately triggering a tightening.

The immediate reaction in the market showed that traders were buying more bonds than stocks.

Taiwan's central bank followed peers in Southeast Asia by keeping its benchmark rate at 1.375 percent, citing mild economic growth and a stable inflation outlook. Accordingly, the yield on the 10-year Treasury has sunk to 2.43 percent from more than 3.20 percent late last year.

But while the Fed is most likely to remain in a holding pattern for the bulk of 2019, another rate hike toward the end of the year or in 2020 can not be ruled out.

The Fed's swerve saw the dollar fall against a basket of currencies on Wednesday.

Britain's 10-year yield decreased nine basis points to 1.064 percent, the lowest in more than 18 months.

The 10-year Treasury yield dipped below 2.5 per cent Thursday, its lowest since January 2018.

The last time a three-month Treasury yielded less than a 10-year Treasury was in late 2006 and early 2007, before the Great Recession made landfall in December 2007. High demand for bonds will, in turn, send yields falling. Would it really be accurate to say that "the Fed" changed its outlook if only 3 of 19 people did so? The Fed has simply arrived at a place where the market has been for many months now - including prior to the 2018 USA midterm elections (see section: How Quickly Do Traders Spot Shifting Fed Narrative?).

"It's unprecedented in the modern era, particularly because he lacks expertise in areas under the Fed's supervision, like banking and monetary policy", said Gary Richardson, a historian of the Fed and a professor at the University of California at Irvine.

The US Federal Reserve on March 20 indicated there might not be any more interest rate hikes this year will. While the White House expects growth at 3.2 percent in 2019 and at least 3 percent in 2020, the Fed actually cut its prediction of 2019 growth from 2.3 down to only 2.1 percent.

The FOMC met this morning, and lo-and-behold: the dovish Fed has proven more dovish than previously thought; the patient Fed has proven more patient that previously thought.

"With a dovish Fed, Asian central banks can now lower real rates", said Trinh Nguyen, senior economist at Natixis Asia Ltd.

As expected, with the U.S. economy decelerating, the U.S. Federal Reserve held interest rates steady, indicating that it would maintain its target range of 2.25-2.50% for the Federal Funds Rate through the rest of 2019.

The S&P 500 Index gained 1.1 percent as of 4:01 p.m. "The outcome of the Fed's March meeting may add fuel to the rally, but there are reasons to be cautious, namely abnormally low volatility and recent equity fund flows".

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