Market Outlook

Chair Powell’s Remarks Reinforce Fed Bets: The Fed to stop quantitative tightening.

The S&P 500 has recovered to a positive 0.27% after being down as much as 1.5% following China’s sanctioning of S.Korean US subsidiaries ships last night.

This has been a volatile session as stocks erased losses after Federal Reserve Chair Jerome Powell signaled concerns about a weakening labor market, reinforcing bets on a rate cut in October.

For its part, the US government didn't overreact as Trade Representative Jamieson Greer told CNBC that the meeting scheduled between the two heads of state was still on.

The bounce naturally started with 2-year, short-dated treasuries, and then widened to the 10-year, as Chair Powell signaled that the central bank may stop shrinking its balance sheet in the coming months. QT had been going on for 3 years and it does seem unnecessary to tighten in the midst of a weakening labor market.

What is Quantitative tightening and easing? The Fed had inflated its balance sheet by buying government bonds at really cheap rates to stimulate the economy during Covid 19, resulting in a bloated balance sheet.  Reversing course, the Fed has been passively reducing its $6.6 trillion asset portfolio since mid-2022, when those holdings peaked at nearly $9 trillion as part of an extraordinary effort to support financial markets and the economy.  When you reverse and reduce your balance sheet, you're rolling over bonds that have matured. That reduces the bloat. Now the Feds have reached or are reaching equilibrium and will end up easing financial conditions.

“We may approach that point in the coming months,” Powell said in remarks prepared for delivery Tuesday in Philadelphia before the National Association of Business Economics, in a tacit dovish tilt, which is likely to result in a 50 basis point cut.

Powell said little to push back against broad expectations that the Fed would cut rates at its coming meeting on Oct. 28-29, even though he said nothing to specifically ratify such expectations.  He said the economic outlook hadn’t changed much since the Fed agreed to cut rates at its meeting last month. They also don't have data because of the government shutdown.