Good news from the Fed. Although the Fed may not reduce rates any time soon, it will start to unwind its balance sheet, reducing QT
Although the Fed might not reduce rates any time soon, the Fed will start to unwind its balance sheet (reducing QT), which will begin to ease financial conditions from next month.
This is a big deal and sets the tone for monetary policy being not so restrictive in the US.
More on QT and the Fed
The market will start to get excited about financial conditions easing next month and throughout the year. And runway was set by the Fed at its May meeting.
The Fed made a dovish policy move, issued a doveish statement and gave a dovish press conference. The bond market told us that, with the 10-year US treasury yield falling for the second day. Below is the 10 year bond yield.
Coming into the meeting the market feared for the worst, thinking the Fed could potentially talk about the possibility of rate hikes. That didn't happen, in fact Powell spoke about how policy as still restrictive.
But the game changing moment, a white flag was that the Fed said it would reduce the pace of quantitative tightening from next month. So although the Fed might not reduce rates any time soon, this is a very big deal and a very positive sign for equities that Fed is reducing QT.
Put, simply, reducing QT is similar to reducing mini rate hikes in a way, albeit at a small scale. But all in all, it effectively will ease financial conditions and this set a positive runaway for easing rates in 2024. And this is positive for equites.
The amount of Treasuries allowed to roll off the balance sheet when they mature will be cut from $60 billion to $25 billion.
So, there could be an imminent end to QT. Which is supportive of equities.
Just remember this
- Financial conditions will slowly begin the ease. The Fed will start to slowly unwind its balance sheet and reduce QT. It's good news for equities and maps a path for 2024.
- This will be the second big lesson for those newbie investors who entered in 2021, 2022 and learnt that bond yields and equities have an inverse relationship.
- It seems those new investors could soon be making 'easy' money again. Maybe... perhaps in 6-12 months? What do you think?
See Nasdaq 100$NDQVs US 10 year Government Bond yield
Disclaimer: Moomoo Technologies Inc. is providing this content for information and educational use only.
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Moomoo Official Market Strategist
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ZnWC : Thanks for the article. Look forward to your sharing about AI stocks.
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151453268 witso : Thanks for some great explanation on fed measures it would seem headed in the right direction for gold at least, historically one factor amongst others needed to see some mining spikes
