Analysts at Deutsche Bank suggest that the Fed Chair Powell yesterday signaled very strongly that the Fed will announce new plans to grow its balance sheet by purchasing treasury bills.
- “He noted that repo markets had experienced “unexpectedly intense volatility” in September and said that “it is clear that without a sufficient quantity of reserves in the banking system, even routine funding pressures can lead to outsized movements in money market interest rates.” He went on to specifically say that “my colleagues and I will soon announce measures to add to the supply of reserves over time.” T-bills rallied, causing swap spreads to widen, as markets moved to price in the expectation for greater and more imminent fed purchases at the front-end of the yield curve.
- Powell took great pains to emphasize that the new balance sheet expansion is just a technical adjustment and is not a new QE program nor a signal about the monetary policy stance. He did touch briefly on the macro outlook, but just reiterated his usual language about acting “as appropriate to support continued growth.” It’s worth noting that he did cite recent Fed staff research on the labour market, which suggests that job growth has not been as strong as would be indicated by the BLS jobs report.
- Our US economists had flagged that research and we included it in the EMR two weeks ago. Chicago Fed President Evans also spoke yesterday, saying that he “wouldn’t mind another cut” for a bit more “insurance.” He had been leaning hawkish lately so that’s certainly a dovish shift.”