The trade war is concluding with an effective tax hike worth about 1% of GDP that will slow growth and raise unemployment in the near term. While the minimum 15% tariff rate on major trading partners is less than that proposed on Liberation Day, it is a substantial increase from the low single digit effective rates last year. Preliminary data suggests that the tariffs will reduce profits or disposable income by at least $300b. That […]
The Supplementary Leverage Ratio reforms will give banks an extra $1.1 trillion in capacity to buy Treasuries, but regulatory relief alone may not be enough to encourage purchases. The SLR imposes costs on banks in proportion to the size of their balance sheet, so it discourages activity in low risk and high volume markets like Treasuries. The proposed lower SLR requirement would facilitate market making, but higher returns are needed to also make Treasuries an […]
The world is structurally very long dollar assets, so a rebalancing of dollar exposure by foreign investors would be a multi-year and self-reinforcing process that weighs heavily on dollar FX crosses. The overtly dollar negative policies of the Administration have prompted some investors to hedge their dollar exposure or outright reduce their dollar holdings. But foreigners maintain exceptionally large dollar exposure that is only growing with the rise in equity prices and persistently large U.S. […]
The passage of the Big Beautiful Bill unleashes a wave of bill issuance that will drawdown reserves enough to give more dovish leaning Fed members a reason to end QT. With the debt ceiling lifted, Treasury will seek to rebuild its cash holdings from the current $370b to a target of $850b over the coming weeks. This will drain RRP balances to zero, push reserve levels to multi-year lows, and place upward pressure on repo […]
President Trump's plan to influence monetary policy through control of the Fed and higher bill issuance will be successful in lowering interest rates, but it may not be positive for equities. Trump has expressed a preference for 1% interest rates and looks to nominate a Fed Chair early in order to influence policy expectations. The FOMC will not support such a large cut, but there is enough flexibility in its mandate for the path of […]
A removal of the Fed's ability to pay interest on reserves would fundamentally change the structure of dollar money markets and put downward pressure across the dollar interest rate curve. The Fed has used IOR as a policy tool since 2011, but Congressional pressure is building to revoke the tool to reduce the fiscal deficit. The Fed is on track to pay commercial banks over $120b this year in interest even when the fiscal deficit […]
