The Fed's signal of a 5bps technical adjustment in the RRP offering rate suggests a slightly longer QT time frame as it would mute upward pressure in money market rates. Technical adjustments are small changes in administered interest rates that can shift key overnight rates upwards or downwards. The recent upward pressure in repo rates appears to have caught the attention of enough Fed officials to telegraph an upcoming 5bps downward adjustment that would slightly […]
A new round of tariffs is much more likely to prompt a dovish monetary policy response on concerns of higher unemployment than a hawkish response on concerns of inflation. Higher tariffs could raise prices, but the inflationary impact would in part be tempered by a strengthening dollar and lower business margins. Most importantly, the Fed would likely be looked through any price increases as transitory. Tariffs are more likely to slow economic growth and dent […]
The incoming Trump Administration does not control monetary policy, but they can still effectively loosen financial conditions by adjusting a range of regulations. Banking regulations can directly influence the amount of loans made by adjusting bank capital costs, which have been steadily rising in the past decade. Some regulatory changes could also directly lower Treasury yields by encouraging banks to widen swap spreads. In addition, government sponsored enterprises like the Federal Home Loan Bank system […]
President Trump's desire to balance trade is functionally an effort to balance the distribution of profits between corporations and labor, so its success would be a market negative event. On the surface, the shocking annual $1t trade deficit in goods appears to suggest that foreign companies are completely dominating the trade with the U.S. But in fact much of the goods imported into the U.S. are sold by U.S. companies who decided to manufacture abroad. […]
There is significant right tailed risk in equity markets as the probability of a Republican sweep in the election is meaningful. Trump is widely perceived as a champion of market positive policies such as corporate tax cuts, but would have limited power to carry out his plans without the support of Congress. Given the Senate landscape, there is an asymmetric risk for a Republican sweep. That outcome would enable inflationary policies that would be positive […]
The potential for larger U.S. fiscal deficits is paradoxically leading to a stronger dollar that tightens global financial conditions and sets off further dollar strength. The increasing probability of higher fiscal deficits appears to be pushing Treasury yields higher, which in turn is increasing the attractiveness of the dollar. Higher Treasury yields are also dragging foreign yields higher despite their weaker economic circumstances. The combination of higher global yields and a stronger dollar amount to […]
