QT termination speech effect (feat. SVB)
Today, rather than a long, long theoretical piece, I’m going to talk about Powell’s remarks. First of all, Powell’s talk about the labor market and inflation is the same as what I’ve already said a lot while talking about the inverse-L Phillips curve….
1). More job openings could push unemployment higher
2). Tariff inflation raises nominal inflation for the time being, but it is temporary (it was also written yesterday)
3)However, if it is too relaxed, there is a risk of inflation again
4)Long-term expected inflation is well fixed.
Well, as I’ve always said, we’ve learned exactly why with models. Today, we’re going to focus on a little more important QT-related liquidity. Let’s take a look at Powell’s QT remarks..
“Our long-standing plan is to stop shrinking our balance sheet when the reserves reach a level slightly higher than we believe are in line with ‘sufficient readiness’,” Powell said.
“We will be able to approach that point in the next few months,” he said. “We are closely monitoring a wide range of indicators to determine this.”
Powell said in a post-speech meeting that the Fed’s indicators “show that reserves remain abundant,” but that “a little tightening is starting to be seen” in the money market, with the repo rate rising.
QT’s end “isn’t that far, but there’s a way to go,” he added – Yonhap Infomax –
And what Fed officials are looking at is the right level of reserves, which is $2.7 trillion. We’ll see the exact level when we get the balance sheet tomorrow, but the current level is $3.03 trillion. Yeah, we’ve got about $300 billion in buffer left
Here, Powell stops shrinking the balance sheet when it reaches a level slightly above what he sees as sufficient readiness… not 2.7 trillion, but around 2.8 trillion dollars. If quantitative tightening ends, long-term government bond rates will likely remain stable, consolidating some downside.
In September, SOFR showed a trend that exceeded IORB more, and TGCR also showed that trend. Now SOFR is 4.15%, the same as IORB. Both SOFR and EFFR are slight, but they are rising from 10/8 to 9.
Perhaps this phenomenon occurred as non-bank financial institutions turned their money to the private equity market while serving as lenders in the repo market. Currently, there are news that AI companies are expanding their investments. In such a situation, I think that banks’ reserves are decreasing, so they should act as a sponge to end QT today.
Yes, the trend of non-banking financial institutions increasing loans on assets… I’m trying to take a closer look at this process. Yesterday, when I talked with Dojun about the private equity market, he said, “There will be a lot more things that are actually not revealed.” After that, Chairman JPM Dimon also talks about this..
According to U.S. economic media CNBC and others, CEO Dimon made the remarks during a conference call after the quarterly earnings announcement, referring to the bankruptcy of subprime lender Tricolor and auto parts supplier First Brands last month. “The credit market has continued to strengthen since 2010, and there are early signs that there may be excesses in the market. If there is a recession, there will be much more credit problems,” he warned.
“If you find one more cockroach, it probably means there’s more,” he said, referring to the Tricolor crisis. “Everyone should be on the lookout for this.” That means more companies could come out that have not yet gone bankrupt but are on the verge of credit. – Nate Newspaper –
Referring to the bankruptcy of Tricolor and First Brands, the cockroach theory is used to mean that if one bad news appeared, more bad news could lurk behind it. It was a theory that was talked about a lot during the 2008 financial crisis..
Of course, it’s not going to explode any time soon, and Dimon has a little fuss about the crisis.. Anyway, there are rumors of a crisis in the private equity market, and there are many questions about the private equity market during yesterday’s JPM conference call, so we need to monitor it a little.