Catch up on more than 40 detailed earnings reviews from this season here.
Table of Contents
Fed Policy:
The Fed Funds rate was held steady at a range of 4.25% to 4.50%. More interestingly, balance sheet runoff, for treasuries specifically, will slow starting next month. Passive quantitative tightening (QT) is now diminishing in response to “some tightness in money markets.” This should help overall liquidity and credit spreads for capital markets. As a reminder, “passive” QT means letting bonds mature without directly replacing them. “Active” QT means openly selling assets pre-maturity. Specifically, following reducing its balance sheet by $2 trillion, the Fed will cut the pace of treasury asset runoff from $25 billion per month to $5 billion. Notably, mortgage-backed asset runoff will remain at $35 billion per month, as the Fed is determined to hold mainly treasuries over the long haul.
In terms of subtle changes to the Fed statement, language surrounding higher levels of uncertainty was loud and clear. They also removed the part of the statement saying risks to the dual mandate are well-balanced, but this is based on heightened uncertainty rather than observed data. Their visibility is never great, but it’s especially foggy today.
Economic & Fed Policy Projections:
Updates to economic projections were based on a “net impact” of four different variables. New trade policy, tighter immigration, fiscal budget cuts and lower regulation. Trade policy is a negative risk for both inflation and output; immigration is mainly a negative risk for output; fiscal budget cuts are a negative risk for output and a positive factor for inflation; lower regulation should be positive for deflationary growth. These were the main ingredients impacting changes to forecasts.